The Dangers and Types of Risks You Will Encounter in the Stock market.
Your investment decisions need to take into account several factors.Edit
Your investment objectives risk and return preferences and the time frame involved. Generally a higher return is subject to a higher risk. Accordingly a low risk portfolio invariably means lower returns.
Below we shall discuss different risks in more detail.
1. Market Risk.
The factors involved here are economic, technological, political or environmental issues. All of these can and will impact on the returns on the investment in the market.
2. Interest Rate Risk.
Interest rate changes will have a direct or indirect impact on your investment or property. Depending on whether they rise or fall.
3. Credit Risk.
Usually this involves the risk of a third party defaulting on their financial obligations. Which of course could have serious ramifications for you especially if their financial contribution impacts on your own financial commitments and the stocks you have invested in?
4. Inflation Risk.
Inflation can cause an investment to lose its purchasing power over a period of time. It will also have a negative effect on cash or fixed interest investments.
5. Currency Risk.
International exchange rates can affect your investments particularly if they are overseas. This applies mainly to managed funds or stock investments which have the majority of their investments in the overseas markets.
6. Liquidity Risk.
If your investments are either in the share market or in cash then liquidity isn’t usually a problem as they can be easily be converted. Unfortunately this does not apply to property investments or term deposits where a financial penalty can be realized through early withdrawal of the funds.
One of the major ways you can minimize risk is to by not having all your eggs in one basket. In other words diversification will ensure that you have maximum exposure to the returns of differently performing assets. Some of which will rise in value while others will mark time.
This means that your best performing assets will offset the worst performing ones. Which will result in an investment portfolio’s volatility being reduced which in turn delivers a better risk adjusted return.
I wish you profitable trading.