Trading Risk Factors
Smaller Company Risk
Smaller companies can experience significant and sudden increases or decreases in value. They often serve small, niche markets or face the challenge of gaining a foothold in a larger, well-established market. Smaller companies can be less resilient to economic shocks and have higher dependency on key personnel. They can also be vulnerable to sudden changes in the nature of their industry sectors, or competition from bigger companies and new market entrants. Outside factors such as the economic climate, market conditions and a change in regulatory environment may all adversely impact on a smaller company’s performance more acutely than they might impact more established companies.
Key Person Risk
Unquoted companies typically have small management teams and are highly dependent on the skills and commitment of a small number of individuals and the ability of the company to continue to attract and retain highly skilled and qualified staff. The loss of a key individual can have a significant effect on a company’s business. The directors cannot give assurances that they or members of the management team will remain with a company.
The company may be negatively affected by wider geopolitical and economic developments. For example, increased input costs to the businesses from the weakening of the British pound versus other currencies making import prices rise, or changes to immigration policies restricting the availability of foreign labour and pushing up prices, and any possible economic consequences may negatively affect the disposable income of domestic consumers. Political instability, domestic or foreign, or international conflicts may also disrupt operations in global markets or have an effect on the investment infrastructure of the UK or prosecution of a company’s business strategy.
Companies introducing new technology or products into existing or new markets may present additional risks. Companies that are very early stage and often pre-revenue can have with limited proof of concept. There is a large degree of technical risk to moving from early proof of concept to full proof of concept: estimating the time and cost required to bring to market is difficult; the market may not develop in the manner in which it is expected; the strategy of the company may not align with market demand; the technology they are pioneering may prove more challenging than anticipated; and new regulations may adversely impact the company’s development.
The company may possess intellectual property, specifically patents, in their technology area. This cannot take into account filings that are not yet publicly available and so there is the possibility of intellectual property from other organisations limiting the commercial scope of the products/technology. The technology may also not be wholly owned by the company but transferred in via a licence, therefore there is a degree of risk on the licensor to uphold that licence.
Governments, both domestic and foreign, can change rules and regulations and this may put additional cost into a company, or create a competitive disadvantage.
Business Plan Prosecution
There are a variety of variables which will affect the prosecution of a company’s business plan. Significant headwinds in any of these areas might materially derail growth and performance plans. These include, but are not limited to: market dependency (over-reliance on a customer or group of customers), competition (new entrant or existing competitor rally), funding (inability to raise required investment rounds), consumer behaviour/product market fit (failure to generate required traction in marketplace), supply chain (over-reliance or key link failure in supply chain), product liability and litigation (legal complications from product failures), cybersecurity (data breaches or cyber attacks), and reputation (negative publicity).
The company may be exposed to the consequences of natural disasters, which can disrupt operations, investments and markets. Health crises, especially pandemics, can have significant impact on the viability of a company’s business model. Armed conflict, domestic or foreign, can also have significant impact, directly in and around the area of conflict but also with wider, global impacts regarding economic and political stability and global trade freedom.
Investors should be aware of the inherent risks associated with the company's reporting accuracy and timeliness. Delays in financial and operational data, uncertainties in financial projections, information asymmetry, compliance challenges, and the possibility of undetected irregularities all pose risks to the company's ability to make informed decisions.
Companies may use debt finance. Whilst a company may enter into appropriate interest rate hedging arrangements, a rise in interest rates is likely to adversely affect a company’s profitability. It is not guaranteed that a company may be able to secure the desired levels of debt given the current banking environment. If this happens, the businesses may need to raise more equity, or use alternative debt instruments.
Currency and Exchange Rate
If a company invests internationally, fluctuations in currency exchange rates can impact the value of foreign investments.