Trading on inter-related securities may seem like a great opportunity for any IRESS trader. You may be able to capitalize on inefficiencies between different companies or markets. However, it is important to understand the risks involved before you pursue trading on IRESS. Inter-related securities are when you have one security traded in another. This means that there are two shares of stock that are related to each other and their price movements should be monitored together. We will explore the details of six risks involved with trading on inter-related securities and how they can hurt your trading account as well as your portfolio if you aren’t careful.
Lack of Liquidity
Inter-related securities are securities that are related to each other. This usually means that one is a stock and the other is a bond. This kind of trading is incredibly risky because there is very little liquidity in the combined market. When someone buys a share of stock and a share of a bond at the same time, the market is flooded with extra supply, causing the value of both shares to drop and make the trader a loss. This leads to an even rarer scenario where the trader could make a gain, but it is very unlikely. Stock and bond trading is an incredibly popular investment strategy. Many financial experts see it as a combination that is sure to yield great returns. Unfortunately, there is a huge issue with this strategy. Inter-related securities are extremely volatile and difficult to trade. With no liquidity in the market and no one to borrow against their holdings, the market is very easy to manipulate. This means that there is a high risk of someone either holding the assets or manipulating the market to make a profit, which is a dangerous combination.
Manipulation Risk
Inter-related securities are extremely risky because they are susceptible to manipulation. When traders buy or sell stock and bonds together, they are always going to fluctuate at the same time. There is no liquidity for one share and no demand for the other. This makes it extremely easy for an IRESS trader to enter the market and manipulate the price to bring it down. Unfortunately, there is no easy way to tell if this is happening. This makes it a risk for anyone who is participating in the market and not just a single trader. The situation is even worse if a group of traders seek to manipulate the market together. This is a huge risk for investors. If a small group of traders manage to manipulate the prices of both the stock and bond markets together, the effect is magnified. The markets could be thrown into chaos and make long-term investing a lot more difficult.
Channel Risk
Inter-related securities pose a significant risk of channel risk. This is when an investment strategy relies on the relationship between two assets to make a return. Often, you would see an investor buy one stock and hold it until it rises in price and then sell it to buy a bond that is tied to the stock. They hope that this relationship between the two assets will yield a return. The main risk with channel risk is that there may not be enough demand between the two assets to make a profit. This is why channel risk is so important. If there is no demand to make a profit from the relation between the two assets, there is no risk. However, there is a risk that the relationship between the two assets does not create enough demand for the investor to make a profit. If this happens, there is a significant risk of losing all of the money invested in the channel. This is a serious risk when it comes to investing in any kind of channel. Let’s say you buy stocks related to a business that barely trades. There is a risk that the business won’t sell a lot of products or services. This would mean that there is no demand for the related products and you could lose all of your money.
