Price Risk

  

Categories: Company Management

Heroes? They risk it all on getting the bad guys. Investors? They risk at all on price risk.

The risk of decline in the price—and therefore the value—of a security...is the price risk. What increases the risk of a decline in price? High-volatility securities. More stable stocks are more reliable stocks, with less price risk.

Of course, savvy investors will hedge against price risk, spreading their eggs in many baskets. Put options and inverse ETFs are two securities designed for hedging against price risk...yeah, the cool kid securities.

What makes a company have more price risk than another? Larger, more established businesses usually have a lower price risk relative to startups. Other than that, certain markets, like commodities markets, are expected to be more volatile on the reg.

Related or Semi-related Video

Econ: What is General Price Level?4 Views

00:00

And finance Allah shmoop What is general price level You

00:07

go to the sort of by your usual weekly staples

00:09

canned chili caramel dip frozen bananas pickled kiwi Ryan's and

00:14

replacement anima tubes Every week you buy the same things

00:18

weekend week out Your grocery cart has the same four

00:21

items It's been like this for years Same stuff every

00:24

week You're a creature of habit And yes you have

00:27

those digestive problems that you might want to check out

00:30

But that's for another video OK overtime prices for the

00:32

individual items move in all different directions Prices for some

00:36

of the items might go up while prices for others

00:38

might go down even when everything moves in the same

00:41

direction While the prices don't change at the same rate

00:44

some see big jumps in price Some barely see moves

00:47

at all For instance in the past year the price

00:49

of a can of chili rose from a buck forty

00:51

six to a buck forty nine an increase of about

00:54

two percent No big deal however Pickled kiwi rinds have

00:58

jumped to seven dollars Sixty nine cents from seven dollars

01:01

nine cents an increase of nearly eight and a half

01:04

percent Yeah much bigger deal Meanwhile the price of anima

01:07

tube's actually fell during the year leaking or dipping to

01:10

six dollars forty nine cents from six seventy four Well

01:13

those air individual price levels But what about general price

01:18

levels Will the general price level is a measure of

01:20

prices across an entire system not just the direction of

01:24

a price the direction of all prices You know general

01:28

prices Right So this week all the items in your

01:31

grocery cart cost you twenty dollars Two cents That's your

01:34

general price level If you want to make an economic

01:37

indicator out of it well call it your personal general

01:39

price indicator or PGP I once you know the general

01:43

price level while you contract overall price changes over time

01:47

So a year ago the four items that you buy

01:49

every week totaled nineteen dollars Forty two cents This year

01:52

Twenty dollars two cents Your PGP I rose three point

01:56

one percent from last year And there's a map new

01:58

minus old overalls that you get that percent growth formula

02:02

thinking well In real life he's general price levels are

02:04

used to track inflation or deflation though well it doesn't

02:08

happen all that often deflating things People like to rattle

02:11

off inflation stats but it's actually a tricky thing to

02:14

really track Honestly you're fairly er accurately in a complex

02:18

economy prices for various products are moving in different directions

02:21

all the time and a different rates all the time

02:24

Combining all this action into a single stat well is

02:27

extremely complicated There are a lot of competing indicators that

02:30

measure the general price levels in the overall economy The

02:33

most high profile of these is the Consumer Price index

02:37

or CP I It works like the total price is

02:40

for your weekly grocery basket except that the CP I

02:44

includes a big basket like a basket with a representative

02:47

sample off of all the stuff people by at least

02:50

all the stuff that CPS measures And it's like thousands

02:53

of things Your personal consumer price index may include just

02:56

those four items that you buy every week You know

02:59

the basket where one in four of the items are

03:01

enema tube But the C P I R consumer price

03:04

index is a lot broader thousands of items that people

03:07

die all the time or in that index So yeah

03:10

enema to prices make up well hopefully far less than 00:03:13.87 --> [endTime] twenty five percent of that index What

Up Next

Econ: What is Implicit GNP Price Deflator?
0 Views

What is Implicit GNP Price Deflator? The Gross National Product (GNP) encompasses both the GDP, which is domestic, as well as international goods a...

Find other enlightening terms in Shmoop Finance Genius Bar(f)