All kinds of investments come with risks. When you choose an asset or a kind of an investment, you’re also choosing its inherent risks. There are 4 types of investment risks out there and all beginners ought to know a thing or two about them.
If you’re a rookie and you’re serious about making money out of the financial markets Charts and Analysis, here are the risks you need to watch out for.
Market risks, also known as systematic risks, consider universal factors that influence the overall performance of economies or financial markets.
Market News and Charts risks have four types: equity risk, interest rate risk, currency risk, and commodity risk.
Equity risks stem from the volatility in stock prices. The market price of shares always fluctuate, largely dependent on the law of supply and demand.
Meanwhile, interest rate risk refers to the possibility of losing money due to the changes in interest rates. Debt investments like bond are usually the ones exposed to this kind of risks. If the rates go higher, usually the market value of bonds go south.
Currency risks exist because of the rise and fall of currency exchange rates. You’re exposed to this kind of market risks when you’re holding foreign investments.
Commodity risks are for people who both use and manufacture commodities. This is the uncertainty caused by unexpected changes in the price of specific commodities.
Default risk refers to the potential for companies and individuals to be unable to fulfil their obligation to pay principal and interest payments on time.
When you invest in corporate bonds, you can get higher returns, but you’re also exposed to higher risk of default. That means there’s a chance you won’t receive the return that you were originally promised if the company slumps, or worse, file bankruptcy.
Pension funds, though generally considered as safe investments, are not also completely safe from the risk of default. A company can try to guarantee that retirees can access free health care. But that benefit could still get wiped out when the company decides it’s time to restructure.
Inflation risks take place when the value of securities drop down because of inflation, which is tracked in terms of purchasing power.
If you hold cash, savings accounts, or bonds, you will likely face this type of risks. The danger with inflation is that these assets might not mature enough to let you realize your long term financial goals.
Financial planners typically believes that inflation runs around 3 or 4 percent annually for a very long time. This enables investors grab at the opportunity to foresee or predict real return for an investment.
Inflation-protected bonds like the Treasury Inflation Protected Securities (TIPS) can be used to keep yourself safe against this kind of risk. Floaters help minimize inflation risk because of the changes in interest rates. All other bonds will make you vulnerable to this risk, since interest rate is set for the life of the bond.