10 Significant Risk Factors When Investing in a Company

Stock Price Volatility
A trader signals an offer at the Chicago Board Options Exchange in December 2012 after the Fed announced it expected to keep a key short-term interest rates at or near zero percent. Scott Olson/Getty Images

Before you invest in a company, you need to make an important decision: Are you in for the long haul, or do you want to turn a quick profit and get out? There are big differences between short-term and long-term investment strategies, particularly when you're dealing with the stock market. In both cases, you want to start by charting the historic performance and volatility of the company's stock price.

Visit a Web site like Yahoo! Finance or Google Finance to view the historic performance of your target stock. A helpful tool on these Web sites is the ability to add an entry for the Dow Jones Industrial Average, the S&P 500 and the stock prices of related companies. See if the stock price of your target company outperforms, underperforms or mirrors the broad market indexes and its competition.

As you zoom in from the five- or ten-year view to the yearly or monthly charts, you will notice far greater fluctuations in the stock price. This is called short-term volatility, and that's why short-term investing is such a risky game. It is extremely difficult to predict the short-term movements of any stock, because stock prices can be influenced by countless factors, only a few of them related to the performance of the company itself.

This is why investment experts recommend taking a long-term strategy. As you can see in a five-year view of the market, long-term trends are easier to spot. Even with stock market crashes, recessions and bubbles, the average annualized growth rate of the S&P 500 during the past 50 years is between 6 and 7 percent when adjusted for inflation [source: Moneychimp].

That seems to make long-term investing a guaranteed success. But as every investment advisor will tell you, past performance is not an indicator of future results. Even long-term trends are susceptible to unforeseen risks and shifts. Just ask the folks who planned to retire in 2010, but whose 401(k) accounts were cut in half by the 2008 recession. Trying to predict the long-term performance of a single company is even more difficult, but past performance will give you a better sense of the level of risk you are taking.