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Issuer risk refers to the chance that the issuer of a security will default. Investors holding these securities would take a loss, which might vary in size depending on how much they paid and the market conditions. Before purchases, investors may conduct careful research to determine the level of risk involved so they can make informed decisions about how to proceed. Analysts and advisers can also offer assistance with selecting the best investment products for given situations.
A number of tools can be used to estimate issuer risk. Once is the balance of debt and equity. A firm with heavy debts and limited equity is at increased risk of defaults, because it needs to spend money servicing that debt and may be in trouble in the event of an emergency. Creditors could call on that debt, triggering a default because the company wouldn’t be able to access enough capital to make good on the obligation.
High equity, especially in the form of liquid assets, indicates that companies are prepared to handle debts and emergencies. The issuer risk is lower, because default is less likely in these situations. These companies may have large obligations, such as substantial contracts with vendors, but these are balanced out by the equity. Mixes of debt to equity can vary, and the economy may dictate the best blend; in a poor economy, high debt can be a cause for concern because creditors may call it in to provide capital for their own operations.
Overall outlook for a business can be another factor. A growing company introducing new, innovative projects and attracting public attention may have a low issuer risk because it is positioned to do well. This can be especially true of companies in emerging sectors of the economy that are creating a foothold for themselves. Aging companies with less flexibility that are struggling to remain relevant can be riskier investments. They may be less capable of adapting to changing market conditions and could suffer with economic trends.
Sources for information people can use to determine issuer risk can be varied. Annual reports can be useful, as can ratings from credit agencies which provide data on the short and long term outlook for various companies. Reviews in investment publications can provide interesting insights into various firms, as can coverage in the mainstream media. Forecasting in business can be a complex activity that is not always perfectly accurate, but combining information from numerous sources can increase the chances of identifying potential risk factors.