How to Calculate Stock Risk (3 Steps)

Evaluate the market risk of the stock. Identify the industry the stock belongs to and read the industry forecast as well as the forecast for the stock market as a whole. If the you are in the middle of a bear market (stock prices are falling), the stock you are interested in is more likely to fall as well.
Measure the stock-specific risks. This risk depends primarily on the performance of the underlying company, namely on its market position, revenues, profits, orders and costs. The company's dividend policy (whether it reinvests its profits or pays them out to shareholders) also matters.A good way to measure stock-specific risks is to calculate the company's price-to-earnings (P/E) ratio. To do that, divide the corporation's market share price by the earnings per share. Alternatively, divide the company's market valuation by the profits it made during the previous year. High P/E ratios (e.g., 30 or above) may indicate that the stock is risky (the average P/E ratio is about 15).A good look at the company's break-up value is also important. The break-up value is basically the amount of money shareholders would get if the company was liquidated. It can be estimated as the company's assets minus its liabilities. The higher the break-up value of a company, the less risky its stock is (investors can recoup their investments even if the company is sold off).The risks to the company's performance may also come from competitors or innovation in the marketplace. Cheap Asian competitors are a particular concern in the 21st century.
Analyse the market and stock-specific risks and evaluate the overall stock risk. What are the chances that the stock price will go down or that the company will fail? Combine the evaluations from Steps 1 and 2 to measure the stock's risk.