Every investment is fraught with investment risk
November 2, 2006 | In: Investing Basics
The investment risk is proportionate to the returns that an investment can deliver. An investor who wants high returns should be willing to accept a high level of risk. The same applies to safe investors. They will make small gains because they are not willing to take large risks.
There are five kinds of risks that every investor faces. The first is the inflation risk. A small investor who wants to play safe invests in instruments like savings bank account or fixed securities. The return on both these investments is small and can easily get eroded by rising inflation.
The second is interest rate risk. The returns from fixed securities like bonds are dependent upon the interest rates fixed by the government or the central bank of a country. These securities lose value when interest rates rise. The loser is the investor, whose income dwindles.
The third is the market risk. This is the most volatile of all risks. The value of stocks or shares depend on several factors, most of which are beyond the control of investors. These include market sentiment, performance of companies, performance of economy, natural or man-made disasters like earthquakes or wars and behavior of large institutional investors.
The fourth is the timing risk. Investments should be held back when the market is bullish or has hit a new peak. Any investment made at this point is fraught with risk. Its value may erode if the market falls. Of course, there are investors who revel in risky investments. Some even make a fortune. But most end up burning their fingers.
The fifth risk is the currency exchange risk. This especially affects investors who have invested in foreign stocks. The value of their stocks rises or falls with the changing value of their home currency.
The investor needs to understand these risks, and take frequent corrective steps if he wants to make money from investments.
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