Some of The Risks You Face As An Investor

Pretty much every saving and investment product has its own inherent risks and returns captured in how readily investors can get their money, when they need it, how fast their money will grow, and how safe their money will be.

There is a degree of risk in every investment. Risk, which generally refers to the degree of uncertainty or potential financial loss inherent in an investment decision, varies in one investment portfolio to another. However, it is common that as investment risks rise, a higher return is expected to reward investors’ daringness.

Pretty much every saving and investment product has its own inherent risks and returns captured in how readily investors can get their money, when they need it, how fast their money will grow, and how safe their money will be. Some of the risks investors face include:

Business Risk

In buying a stock, an investor purchases a stake in a company and thus shares in the risks associated with a business. Similarly, with bonds, an investor shares the same risk in giving out funds to a company.

More so, returns from these two investments require that that the company scales through tough waters, stay in business, and performs competitively.

However, if a company goes bankrupt and has its assets liquidated, its common stockholders are usually the last in line to share in the proceeds as the company’s bondholders are often first to be paid if it has assets to clear before holders of preferred stock.

The common stockholder usually gets whatever is left, which sometimes could be nothing.

In purchasing an annuity, an investor must endeavour to consider the financial strength of the insurance company issuing the annuity. It is important that the company as the potential to still be around and be financially stable during the investors pay-out phase.

Volatility Risk

It is pertinent to note that the stock prices of companies fluctuate even when companies are not in danger of failing whereas market fluctuations are often unnerving to some investors.

However, stock price may be affected by internal factors such as a faulty product or by external events such as political or market events which the company might just not have any control over.

Inflation Risk

Generally, inflation decreases the purchasing power and poses a risk for investors receiving a fixed rate of interest. The principal concern for investors putting in cash equivalents is that inflation will erode returns.

Interest Rate Risk

Interest rate changes can affect a bond’s value as well. If bonds are held to maturity the investor will receive the face value, plus interest. If sold before maturity, the bond may be worth more or less than the face value.

Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.

Liquidity Risk

This can be the case with the more complicated investment products. This refers to the risk that investors will not find a ready market to trade their securities, potentially preventing them from buying or selling when they want.

It may also be the case with products that charge a penalty for early withdrawal or liquidation such as a certificate of deposit (CD).

Written by Lawretta Egba