Risks are an integral part of investments and no matter what type of investment you are dealing with, they will always be there. This blog will talk about the major risks involved in investment. The risks involved are:
Market Risks: The risk of investments in Indialosing value as a result of economic developments or other events affecting the entire market. Market risk is classified into three types: equity risk, interest rate risk, and currency risk. Equity risk – refers to the risk of investing in stocks. The market price of shares fluctuates all the time based on supply and demand. The risk of loss due to a drop in the market price of shares is known as equity risk. Interest rate risk – This risk is associated with debt investments such as bonds. It is the risk of losing money as a result of an interest rate change. For example, if interest rates rise, the market value of bonds falls. Currency risk – this applies if you have foreign investments. It is the risk of losing money as a result of a change in the exchange rate.
Liquidity risk: The risk of not being able to sell your investment at a reasonable price and withdraw your funds when you want to. You may have to accept a lower price in order to sell the investment. In some cases, such as exempt market investments, the investment may not be able to be sold at all.
Concentration risk: The risk of loss as a result of your money being concentrated in a single investment or type of investment. Diversifying your investments spreads the risk across various types of investments, industries, and geographic locations.
Credit Risk: The possibility that the government entity or company that issued the bond will face financial difficulties and will be unable to pay the interest or repay the principal at maturity. Credit risk is associated with debt investments in India such as bonds. The credit rating of the bond can be used to assess credit risk.
Reinvestment Risk: The possibility of losing money by reinvesting principal or income at a lower interest rate. Assume you buy a 5-percentage-point bond. If interest rates fall and you have to reinvest your regular interest payments at 4%, you will face reinvestment risk. Reinvestment risk will also apply if the bond matures and you are required to reinvest the principal at a rate less than 5%. If you intend to spend the regular interest payments or the principal at maturity, reinvestment risk does not apply.
Inflation Risk: The risk of losing purchasing power as the value of your investments fails to keep pace with inflation. Inflation erodes the purchasing power of money over time, resulting in the same amount of money purchasing fewer goods and services. Inflation risk is especially important if you own cash or debt investments such as bonds. Shares provide some inflation protection because most businesses can raise their prices to their customers in best investment. As a result, share prices should rise in line with inflation. Real estate also provides some security because landlords can raise rents over time.
Horizon Risk: The possibility that your investment horizon will be shortened due to an unforeseen event, such as the loss of your job. This may necessitate the sale of investments that you had planned to hold for the long term. If you have to sell during a down market, you may lose money.
Longevity Risk: The possibility of outliving your savings. This risk is especially relevant for people who have retired or are about to retire.
Foreign Investment Risk: When investing in foreign countries, there is a risk of loss. When you buy foreign investments, such as shares of companies in emerging markets, you expose yourself to risks that do not exist in Canada, such as the risk of nationalization.
As risks are an integral part of investments, they cannot be avoided. However, with the right set of tools, strategies and help, the risks can be minimized to a great extent. Tradeplus provides the right set of platforms, tools, services and guidelines that will help you minimize the risks involved in investing.