What is investment risk?
Investment risk refers to the possibility of losing money on an investment relative to the expected return on a particular investment.
The investment risk includes the possibility of losing some or all of the original investment.
Generally, higher investment risks require investors to look for higher returns to compensate for taking the risks.
What is a company share?
Simply put, a company share represents one equal unit into which a company’s equity is divided. Simply put, a share is a unit of ownership of a company.
The Companies Act (Act 71 of 2008) defines a share as ‘one of the units into which the proprietary interest in a profit company is divided.’
(Refer to the article, ‘A General Overview of Company Shares in South Africa’, for more detail about company shares in general.)
Risks of investing in company shares
Investing in shares, as with most investments, comes with a certain degree of risk. Although, when shares are compared to other types of investments, they are often classified as ‘high-risk asset classes.’
There are numerous possible risks involved in investing in company shares. This article will focus on 10 of them – not necessarily in a particular order of importance.
Market risk
Market risk, also referred to as ‘systematic risk,’ is the possibility that an investor can experience losses due to external factors that impact the overall performance of stock markets in which he or she has invested in shares of companies.
It is a type of risk that is likely to influence an entire market. Causes of market risk are, inter alia: natural disasters, recessions, political turmoil, terrorist attacks, natural disasters (hurricanes, floods, and droughts), and a once-in-one-hundred-year event, such as the Covid-19 pandemic in 2025.
It was widely reported that the USA experienced one of its ‘most dramatic crashes in history’ in March 2025. The Dow Jones Industrial Average (DJIA) plummeted 6 400 points (= roughly 26 points) in four days.
Likewise, the All Share Index (ALSI) and the Top 40 Index of the JSE plunged considerably during March. The ALSI suffered its fourth-biggest fall (9.7%) in history on March 11.
Market risk is usually driven by fear and uncertainty, propelling investors to act on emotion, rather than analysing the situation rationally.
The so-called ‘herd mentality’ also plays a significant role in market risk. In finance and investments, herd mentality refers to investors’ inclination to follow and copy what other investors are doing.
Market risk is also defined by some analysts as ‘the tendency of security prices to move together.’ When the market is in free fall, even the shares of top companies decline.
Liquidity risk
Some companies’ shares can be illiquid, meaning it can be difficult to buy or sell them.
Liquidity risk implies that the demand for and supply of a company’s shares are not sufficient due to specific reasons. Therefore, there can be a delay in the sale of the shares, forcing an investor to sell the shares at a lower price as intended.
Shares are considered thinly traded when their supply and demand are thin and cannot simply be sold for cash without a significant change in price.
Risk of bankruptcy
The bankruptcy of a company entails the possibility that shareholders may lose their entire investment in the company, or at least part of it.
Creditors and preference shareholders have preference over ordinary shareholders when money is distributed when a company is dissolved.
No guarantee of return
Company shares are subjected to normal fluctuations in a stock market as well as other risks applicable to investing in securities. There is no guarantee that the shares of a company will continue to appreciate in value or will never depreciate.
The value of an investment in shares may rise and fall and it is possible that an investor may not recover the original amount invested in a company after the amount has declined.
Dividend payment risk
Companies are not required to pay dividends to ordinary shareholders. Hence, there is a risk that a company will not pay dividends.
A decision by the board of directors on the payment of a dividend will depend on, among other factors: earnings available, the cash flow situation, plans to re-invest in the company, and the general financial situation of the company.
Risk to overemphasise past performance
The past performance of a company is not necessarily a reliable indication of its future performance.
Headline risk
Headline risk refers to a situation when negative issues (such as scandals) of a company are headline news in the media. The risk is that such news can hurt a company considerably and its market capitalisation can dramatically decline.
A well-known South African example is the Steinhoff company, described as the Steinhoff saga and possibly the biggest case of corporate fraud in the history of South African companies.
Steinhoff’s share price started to collapse on December 5, 2017, after the resignation of its CEO, when it was observed that the company’s external auditors were not prepared to sign off its 2017 financial statements. For example, the Steinhoff share price dropped from R46 to under R6 from December 6 to December 8.
It is clear that bad news can lead to a market backlash against a company.
Detection risk
Detection risk is the risk that the company’s auditors, regulators, or other authorities will fail to discover ‘skeletons in the closet’ until it is too late.
In this regard, Steinhoff is also an example of detection risk. The VBS Mutual Bank is another example when about R2 billion simply disappeared, orchestrated by, inter alia, the chairman, the chief executive, and the auditor!
The VBS scandal started to surface when a number of the bank’s clients claimed they had not been able to withdraw their savings.
Risk of share dilution
Share dilution, also known as equity dilution, occurs when a company issues new shares, resulting in a decrease of a shareholder’s percentage of ownership of the company.
Share dilution can also happen when holders of share options exercise their options or when a company offers a rights issue.
Legislative risk
Legislative risk refers to the risk that a government’s actions will impact a company or industry negatively. The actual risk can include new regulations or standards set by the government and tax increases.
In conclusion
Although faced with numerous risks, the rewards of investing in company shares still far outweigh the risks.
The following actions, among others, can help to mitigate the risks involved in investing in shares:
- Diversify your investment portfolio by including different types of asset classes.
- Have a long-term outlook.
- Control your emotions.
- Get acquainted with the ins and outs of the company (companies) you want to become part of.
Note: This article does not intend to provide investment or trading advice. Its aim is solely informative.
