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3. There are various risks you may subject yourself to
by taking out a certain investment. By risk, we mean
a situation that could potentially arise and have a
negative impact on the value of your investment. But,
remember, it’s important to consider risk and return;
while there is potential to lose, there is also potential
to gain.
As they say, nothing great was achieved without risk. In an ideal world,
we would be able to invest our money with little danger of anything
going wrong, and we would see a big profit in return.
4. •Liquidity risk
This type of risk is when limited
opportunities mean that an investor
cannot purchase an investment when
they want to or in the quantities they
need.
•Business risk
Next we have business risk, which is a
general term used to describe the risk
linked with a certain security.
Companies operating within the same
sector are going to have similar risks.
• Taxability risk
This refers to a situation whereby a
security that came with a tax-exempt
status initially then loses this status.
This applies to municipal bond
offerings.
•Credit risk
Credit risk is when a bond issuer
cannot make the principal repayment
or is struggling to make the expected
interest rate payments.
Different types of investment risk:
5. • Interest rate risk
This refers to a situation whereby interest
rates increase, which could cause a
fixed-rate debt instrument to lower in
value. Interest rate risk is something you
need to be concerned with if you buy
bonds or securities with a fixed rate of
return.
•Market risk
Market risk cannot be controlled by
diversification; it is a risk that will impact all
securities in an identical manner. This is
also known as systematic risk.
•Liquidity risk
Finally, reinvestment risk involves a situation
when the investor is often forced into buying
securities that do not offer the same amount
of income as their previous investment. This
is because the environment is one whereby
interest rates are declining and bonds are
due to be called in.
7. Of course, the cash that you have available to invest is going to be a major determining
factor. If you are strapped for cash at present, the last thing you should be doing is putting all
of your money into a high-risk investment portfolio. Aside from this, you need to consider how
important an investment portfolio is to your financial well-being, and how long you will invest
for. Time plays a crucial role when it comes to investment portfolio management. If you have
got time on your side, you can afford a greater degree of risk, as your investments will be
able to overcome any difficult periods.
