People with less disposable income tend to be, by necessity, more
risk averse. On the other hand, day traders feel as though if they are
not making trade after trade everyday, there is a problem. In most
instances, these high-volume traders are motivated by the belief that
more risk can equate to more profits. Albeit true in some instances, it
is wise for investors to completely understand that investing involves risk
and that there are different types of risk that can adversely affect
their investment return. With that being said, here are 8 risk factors
to consider, before pursuing an investment opportunity of any kind.
Foreign-Exchange Risk:
When investing in foreign countries you must consider the fact that
currency exchange rates can change the value of the asset as well.
Credit or Default Risk:
This is the risk that a company or individual will not be able to pay
the interest or principal on its debt obligations. This type of risk is
very concerning for investors who hold bonds in their portfolios.
Systematic Risk: A significant political event, for example, could affect several of the assets in your portfolio.
Unsystematic Risk: An example is news that would affect a specific stock, like a sudden strike by employees.
Country Risk:
This is the risk that a country will not be able to honor its financial
commitments. This can also harm the performance of other investments in
countries the default country has relations with.
Political Risk: This represents the financial risk that a country’s government will suddenly face if it changes its policies.
Interest Rate Risk:
This is the risk that an investment’s value will change as a result of a
rise/drop in interest rates. This risk affects the value of bonds more
so than stocks.
Market Risk: This is the most familiar of
all risks. Also referred to as volatility, market risk is the
day-to-day fluctuation in stock market prices.
An aggressive
investor, or one with a high risk tolerance, is someone who is willing
to risk losing money; to potentially earn a better return. A
conservative investor, or one with a low risk tolerance, often prefers
investments that are more likely to maintain the original investment
value. It is important for you to identify what kind of investor you are
and determine how much exposure to risk you are comfortable with,
before investing. This approach will increase your odds of choosing the
investment offerings that can deliver long-term investing success and profits with less associated risk.
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