Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks - Essay Example

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Critically discuss the sources of fundamental risk involved in investing in Microsoft stocks

The bottom-up approach works in the opposite way starting at the company level and then going up to industry and the overall economy. Fundamental analysis has its strengths in forecasting long-term trends, determining the company's fair value in terms of asset valuation, strong balance sheet, earnings stability, and staying power1.
There are certain risks involved in any stock investments. A company may face one or more of the several sources of fundamental risk, namely, business risk, financial risk, liquidity risk, exchange rate risk, country risk, interest rate risk, and credit risk2.
Domiciled in Seattle, US, Microsoft has its offices in 100 countries. As per the information excerpted from its annual report for the year 2006, Microsoft reported a net income of $12.5 billion. Such profitability, however, does not get achieved without taking risks. Investors need to be aware of what risks Microsoft tackles with in order to satisfy its stakeholders.
Microsoft, in its operations, encounters business risk which is the risk reflecting uncertainty in cash flows caused due to a number of reasons. Microsoft faces intense competition across all markets for its products and services.
Its competitors range from Fortune 100 companies to small, specialized single-pr ...Show more

Summary

Analyzing the risks involved in a company's stock requires a test of its fundamentals. Fundamental analysis is the technique used to conduct such a test. This particular analysis involves an examination of the underlying forces that affect the health of the economy, industry groups, and companies…
Author : clegros
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