What are the investment risks? How is investment risk managed? How do you reduce these risks?

[ad_1]

When it comes to defining investment risks, here’s the truth: All investments carry some degree of risk. You can lose stocks and bondsMutual funds AndExchange traded funds Its worth, even all its worth, if market conditions worsen.

Even conservative, insured investments, such as Certificates of Deposit (CD) issued by a bank or credit union, come with inflation risks. They may not earn enough over time to keep up with the rising cost of living.

Definition of investment risk

Investment risk can be defined as the likelihood or possibility of losses relating to the expected return on any particular investment.

In simple terms, investment risk is a measure of the level of uncertainty in achieving returns as per the investor’s expectations. It is the range of unexpected results to be achieved.

Risk is an important component in evaluating investment prospects. Most of the investors while making the investment consider the less favorable risks. The lower the investment risk, the more profitable the investment. However, the rule of thumb is that the higher the risk, the better the return.

Types of investment risks

Let’s have a look at different types of investment risks:

1- Market risk

Market risk is the risk of an investment losing its value due to various economic events that can affect the entire market. The main types of market risk include:

  • Equity risk: These risks relate to investing in stocks. The market price of shares is volatile and keeps increasing or decreasing based on various factors. Thus, equity risk is the decrease in the market price of shares.
  • Interest rate risk: Interest rate risk applies to debt securities. Interest rates affect debt securities negatively, meaning that the market value of debt securities increases if interest rates decrease.
  • Currency Risk: Currency risk relates to foreign exchange investments. The risk of losing money from foreign currency investments due to movement in exchange rates is currency risk. For example, if the value of the US dollar depreciates against the Egyptian pound, then an investment in US dollars will have less value in the Egyptian pound.

2- Liquidity risk

Liquidity risk is the risk of being unable to sell Money bills at a fair price and convert it into cash. Because of the lack of liquidity in the market, the investor may have to sell the securities at a much lower price, thus losing value.

3 – Concentration risks

Concentration risk is the risk of loss on the amount invested because it is invested in only one security or type of security. In concentration risk, the investor loses almost all the amount invested if the market value of the invested securities decreases.

4- Credit risk

Credit risk applies to the risk of default on bonds issued by a company or government. The issuer of a bond may experience financial hardship due to its inability to pay interest or principal to bond investors, and thus default on its obligations.

5 – Reinvestment risks

It is the risk of losing higher returns on principal or income due to a lower rate of interest. Keep in mind that a bond that offers a yield of 7% has matured, and the principal must be invested at 5%, thus missing an opportunity to earn higher returns.

6- Inflation risks

Inflation risk is the risk of losing moneypurchasing power Because investments do not bring returns higher than inflation. Inflation weakens returns and reduces the purchasing power of money. if it was return on investment Below inflation, the investor is at higher risk of inflation.

7 – Horizon risk

Horizon risk is the risk of shortening the investment horizon due to personal events such as job loss, marriage, home purchase, etc.

8 – Longevity risks

Longevity risk is the risk of outrunning savings or investments, especially as it relates to those who are retired or close to retirement.

9 – Foreign investment risks

Foreign investment risks are the risks of investing in foreign countries. If the country as a whole is at low risk gross domestic product or inflation High altitude or civil unrest, the investment will lose money.

Investment risk management

Although there are risks in investing, these risks can be managed and controlled. Different approaches to risk management include:

  • Diversification: Diversification involves distributing investment over different assets such as stocks, bonds, real estate, etc. This helps the investor because he will earn from other investments if one of them does not work. Diversification can be achieved across different assets and also within assets (for example, investing across different sectors when investing in stocks).
  • Consistently investing (average): By investing consistently, that is, investing small amounts at regular intervals, you can reduce investment risks. He will sometimes buy high and sometimes buy low and maintain the initial cost price of the investment. However, if the investment rises in market price, he will earn from the entire investment.
  • Long term investment: Long-term investments provide higher returns than short-term investments. Although there are short-term fluctuations in stock prices, they generally pay off when investing over a longer term (5,10, 20 years).

Conclusion

Investment risk is the uncertainty of losing the invested amount. All investments carry some degree of risk of loss, but by better understanding and diversifying the risks, the investor may be able to manage these risks. By managing risk better, the investor will be able to have good financial wealth and achieve his financial goals.

  • Investment risk is the risk of losing invested money due to a decrease in the fair price of a security.
  • Higher risk securities give higher returns.
  • The risks mainly include, but are not limited to, market risk. There are other types of risks such as credit risk, reinvestment risk, inflation risk, etc.
  • Although investment risks relate to almost all types of investments, they can be reduced by diversification, average investing, and long term investing.

Investment risks by type of investment

No asset is truly risk free, however assets Different carry different risks:

criticism

Cash is the least risky of the four but tends to have low returns, which means that the value of your money can be eroded by inflation.

bond

One step up on the risk ladder is government bonds, or gold bonds, followed by investment grade corporate bonds, effectively lending money to large corporations for a fixed rate of interest.

High-yield bonds, also known as “junk bonds,” are a riskier option because they deal with companies that are seen to have a high risk of default.

shares

Stocks are seen as among the riskier assets, as stock markets can be highly unpredictable. But some markets are riskier than others.

Investing in developed markets such as the United Kingdom and the United States is relatively safe compared to other equity markets, although they contain their share of higher risk options as well, while emerging markets (such as Brazil, China, and India) are likely to be more volatile.

Buying stocks in geographic areas less frequented by investors can be expensive and stocks can be relatively illiquid.

cryptocurrency

There are many cryptocurrencies, one of which is bitcoin. Cryptocurrency prices have been very volatile in recent years, rising and falling in a short period of time, so they cannot be considered as a low-risk asset.

Cryptocurrency investments are not covered by the Financial Services Compensation Scheme, and scams are common.

gold and silver

He has long relied on gold as a safe haven, as its price tends to rise when stock markets are struggling. But it’s not without risk – gold prices can drop, gold doesn’t pay dividends, and you’ll need to pay to store actual gold (money invested in gold is also available).

Silver is more volatile and suffers from greater price changes, as well as disadvantages similar to gold.

Real estate investment risks

Investing in commercial real estate, such as offices, supermarkets, and warehouses, can grow your money through rental income and growth in the value of the property you own, but it can also be illiquid — meaning it can be hard to sell if you need access to your money.

Find out more: What is real estate investment

common questions

What are the investment risks?

Investment risk is defined as the possibility or uncertainty of losses rather than the expected profit from an investment due to a decrease in the fair price of securities such as bond AndStock real estate and so on. Each type of investment is exposed to a certain degree of investment risk such as market risk, i.e. loss of the invested amount or default risk, i.e. the money invested is never returned to the investor.

Why is investment risk important?

Whether you’re investing with a goal in mind, or you’re simply saving for retirement, it’s important to understand the risks. Specifically, you must understand your stance on risk. Some people are happy to live with calculated risk if it means the chance of a higher return in the long run; Others do not want to lose money under any circumstances.
But being too risk averse can in and of itself lead to losing money. Here we explain the different types of risk, whether you should be concerned and what you can do.



[ad_2]

Source link

Leave Your Comment