Investment Risk

Inflation Risk

Investments must grow at a higher rate than inflation if they are to be considered successful investments. Inflation risk is the possibility that the investment will grow at a rate below the rate of inflation in the economy. If you have invested in debt or cash-based investments, inflation risks are generally higher. Equity is better protected because businesses have a fair amount of control over what they charge their customers, enabling them to factor in their own inflation costs.

Default Risk

This is the risk inherent in all investments. It arises from the possibility that a company will ‘default’ on its debt obligations. Companies with a higher default risk generally have to project a correspondingly higher rate of return in order to attract investors.

Liquidity Risk

The risk that you will be unable to sell your investment for a fair or reasonable price is known as liquidity risk. When investing in stocks that have a poor liquidity, you will need to be reasonably sure that your investment is capable of making a full recovery at some time in the future. However, if you are in desperate need of money, selling the investment will likely result in a loss. There is also a chance that you may be unable to sell it.

Re-Investment Risk

This is a risk arising from the possibility of loss when reinvesting the principal or income to earn a lower interest rate. If you consider a bond that pays interest @5% p.a., lower interest rates on reinvestment will have a negative effect on your profitability.

Business Risk

The risks faced by a company or organization also affect the people who have invested in it. Anything that can reduce the profitability of a company, or make it unable to meet its debt obligations, constitutes a business risk.

Interest Rate Risk

This is a risk that pertains largely to debt-based securities that return value in the form of interest. An increase in the rate of interest will cause the value of these securities to drop, leading to a loss for investors.

Market Risk

This is a risk that comes from the behavior of the market and the trends that govern it. These could be a result of economic & technological developments, social and political events, and anything that can influence the mind of an investor.

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