Investments are business opportunities that promise a return in the future. The promise of returns comes with an element of risk associated with each type of investment. The risk and its promised return must be balanced. Usually, a high-risk investment comes with a high rate of return and low risk with a lower rate of return. The most common risk investments are market risk, concentration risk, and foreign investment risk. Various factors involved in investment risk include government or corporate policies, legal decisions, international markets, and political situations, new technology, and even environmental factors.
There are three main objectives of investment, including safety, income, and growth. Investing does not only mean the use of money, but it can also be in the shape of time, education, skill, and experience. Investment can also involve starting or expanding an existing business. Some of the most common types of investments include stocks, bonds, assets, funds, investment trusts, hedge funds, private equity, and real estate, etc. Profit and risk are two faces of the coin while investing.
Typically, low investments involve low returns, while high investment involves high risk. Investment in Certificates of Deposit is of low-risk category while investing in bonds, or fixed-income instruments are of higher risk. Risk factors within the same class can still vary a lot. It is imperative that before choosing to invest in any company, one must read reviews about finance companies. However, no investment in the world is risk-free. Some of the common dangers an investor comes across are:
Business/Company Risk
If you have invested money in some stocks or a company, then to make a profit out of your investment, those companies grow in business; otherwise, if the company you have invested in goes bankrupt, you will have to share the loss. The same is true if you are buying an annuity; you will have to consider the financial strength of the insurance company. Otherwise, you may end up losing investment.
Volatility in Stock Price
Fluctuation in the stock price due to market situation, political situation, or company’s performance can also lead to a loss in the investment. Keep an eye out for the following factors to minimize risky investments.
Inflation
Since inflation reduces buying power, it can involve loss for investors receiving a fixed rate of interest. It can also
Interest Rate fluctuation
Changes in interest rate affect bond value, thereby leading to a decline in the investment.
Liquidity
Liquidity risk occurs when investors are unable to sell or buy due to the absence of a reasonable price.
Increase/Decrease in Currency value
Those investors who invest in foreign markets or companies are at risk of currency devaluation. Investing in multiple companies can reduce this risk, though.
Political Situation
The political situation of a country or the region also affects investments. The security situation, military coup, war, or terrorist attacks are some of the factors that can affect the political situation of a country or the region.
Credit Risk
It occurs when businesses are unable to pay their debts. It can also relate to bond issuers who are unable to make payments at the maturity date of the bond.
Every investment loses money, some very quickly, whereas others can lose money from time to time. It is, however, essential to know as to for how long you will invest? Investing for a more extended period can give you a healthy return. Those who are close to their retirement should invest in low-risk investments, where profits can be comparatively less, but investment remains safe.
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