In a previous article on this website (What is the risk of investing?) it was mentioned that the largest risk for a company is bankruptcy. But how big is the risk of bankruptcy? And how can that risk be determined for a specific company? To answer these questions, the model of the Altman Z-score can be used.
Lots of investors and investment experts try to make predictions about the stock market. For their predictions, they use technical analysis or predictions about specific shares. But can predictions about the stock market be made? Or is it impossible to make predictions about the prices of specific shares? In this article I will explain how (un)predictable the stock market really is.
Investment experts and predictions
Investment experts who are making predictions about investing, can be found at many places. Most of these predictions are based on experience or theories of these experts. In other articles, there is already written that predictions should never be taken for granted and being the whole (possible) truth. But how can you identify an investment expert that is reliable, and how can you see what is a good prediction and what is not.
What is the risk of investing?
In short, risk is, in terms of an investor, the chance that an investment will result in a loss. To be more precise: Risk is the probability that the downward potential is partially used before investors can anticipate. The latter is important because if an investor knows in advance that a stock will fall, then the investor will not buy the share. The investor would try to make a profit of the downward potential of a share by, for example, buying put options or sell call options.