What Are The Types of Investment Risk When Investing?

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.