Investment risk explained

Investment risk is the probability or likelihood of occurrence of losses relative to the expected return on any particular investment. Simply put, risk is a measure of level of uncertainty of achieving returns as per the expectations of the investor.

There are risks associated with any form of investment, therefore, investors should know the features of their investment and obtain independent advice from a registered financial advisor or stockbroker before investing.

Types of investment risks

Investors should be aware of the different types of risks and how they affect their investment returns. Below are some risk types:

Market risk

Market risk is the possibility of an investor experiencing losses due to factors that affect the overall performance of the financial markets in which the investor is involved.

It consists of several events or situations over which we have no control. The main types of market risks are as follows:

◆ Equity risk — applies to an investment in shares. The market price of shares varies all the time depending on demand and supply. Equity risk is the risk of loss because of a drop in the market price of shares.

◆ Interest rate risk — applies to debt investments such as bonds. It is the risk of losing money because of a change in the interest rate. If the interest rate goes up, the market value of bonds will drop.

◆ Currency risk — applies to foreign investments. It is the risk of losing money because of a movement in the exchange rate.

Liquidity risk

This is a risk stemming from the lack of marketability on an investment that cannot be sold or quickly converted to cash without loss.

Liquidity risk occurs when an individual investor, business, or financial institution cannot meet its short-term debt obligations.

We shall discuss more types of investment risks in next week’s article.

Upcoming AGMs and EGMs

◆ AFDIS, Head Office, St Marnock’s, Lomagundi Road, Stapleford, November 8, 2019, 1100hours.