As it is said by Warren Buffet, risk comes from not knowing what you’re doing. So, you better clearly understand what types of investment, and what risks that it can bring. In fact, there are several common risks that every investor should know in order to help them find the best investment for their needs, and here are several of them.
Interest Rate Risk
Interest rate risk is the possibility that a fixed-rate instrument will decline in value as a result of a rise in interest rates. Whenever investors buy securities that offer a fixed rate of return, they are exposing themselves to interest rate risk. This is true for bonds and also for preferred stocks.
Every business has a risk which is known as unsystematic risk and refers to the risk associated with a specific issuer of a security. Generally speaking, all businesses in the same industry have similar types of business risk. But used more specifically, business risk refers to the possibility that the issuer of a stock or a bond may go bankrupt or is unable to pay the interest or principal in the case of bonds. A common way to avoid unsystematic risk is to diversify – that is, to buy mutual funds, which hold the securities of many different companies.
Once you purchase an asset or income, it will bear the risk that the value of an asset or income will be eroded as inflation shrinks the value of a country’s currency or it is a most common risk that could happen when you invest that future inflation will cause the purchasing power of cash flow from an investment to decline. Therefore, being sensible to choose your investment type is important for this case, you can choose to have stocks or convertible bonds, which have a growth in value along with the inflation value.
Because the opportunities are limited, there is a possibility that an investor may not be able to buy or sell an investment because of the insufficient quantities. A good example of liquidity risk is selling real estate. In most cases, it will be difficult to sell a property at any given moment, unlike government securities or blue chip stocks.
Market risk is widely known as systematic risk since it will affect to all securities in the same manner. In other words, it is caused by some factors that cannot be controlled by diversification. Therefore, it is important to consider this thing when you are trying to consider mutual funds, which are appealing to investors in large part because they are a quick way to diversify. However, you must consult yourself in order to meet your client needs in diversification.