Every investment option has certain risk associated with it which can lower the value of your investment. These risks can be:
1)Credit-Risk
It is the risk that a borrower will default i.e. it is not able to pay its debt. The borrower is an issuer of a particular bond, stock or other investment. The debt can be a principal amount or interest or both. This can happen if a company's market share suddenly decreases or it become bankrupt. This risk can be reduced by diversifying your investment i.e. invests your money in more than one company, than in a single company. No matter how good the company (in which you have invested) is doing, the value of your shares will go down if there is an overall decline in the stock market. This can happen in case of corporate bonds.
2) Liquidity-Risk
Liquidity is the ability of an investment to easily and quickly get converted into cash without incurring considerable losses. Any item that can be converted into cash is known as the asset. It can be a house, land, furniture, bonds, debentures, stocks etc. Liquidity-risk is the risk that an investment when prematurely converted into cash will incur considerable losses. To reduce this risk invests in those assets which are highly liquid like stock of a publicly traded company. The assets which are highly illiquid have high liquidity risks like house, commercial properties etc.
3) Market-Risk
It is the risk that value of stock prices will go down. It is also related with the volatility of an investment. Volatility means sudden rise or fall in value of an asset. The more volatile an investment is, more profit or loss you can make.This can happen due to change in interest rates, exchange rates and commodity rates; decline in economy, recession in a particular industry, decline in company's revenues and profits etc. To reduce market risks:
a) Diversify your investment- Invest your money in both fixed income assets and growth assets.
b) Periodically monitor and review your investment plan, ignore market ups and downs and focus on long term returns. These risks are generally related with stocks and mutual funds.
4) Interest-Rate-Risk
It is the risk that the change in interest rates will lower the value of investment. This risk is generally associated with fixed income assets.
5) Inflation-risk
It is the risk that rises in inflation rate will lower the value of your investment. Invest in growth assets like stocks to reduce this risk.
By Himanshu Sharma
No comments:
Post a Comment