Different Risks Associated with Investing : NobleTrading Blog

Monday, February 23, 2009

Different Risks Associated with Investing

Investing in financial instruments is a risky practice. It is this risk that often corresponds to the return, the more the risk taken the more the possibility of return. There are more than one risk associated with every investment. Here are some important ones.

Business or company risk – This is the risk investors take against the company’s (they invested) performance. Good fundamental analysis and careful selection of equities are the best ways to minimize this risk.
Liquidity risk – this refers to the flexibility of an instrument to be converted into real-money with out much loss in value. Liquidity greatly differs with products and time. In general there are many high-liquid instruments, which stay liquid throughout the year, and low-liquid instruments.
Non-payment risk – this is the risk of not getting timely financial assistance. Fore example you may not get timely payments of your tradeoffs and thus you can’t make further investments or can’t payoff your debts or can’t hedge your current positions.
Inflation and Interest rate risks – these are the risks which greatly reduce an investors buying power or reduce value of his investments. These are macro-economic phenomena which are hard to overcome personally, careful section of instruments and rearrangements of portfolio assets can help.
Market risk – this is the risk of reduction in value of investments because of factors that affect total market prices. Almost all instruments have market risks but the effect can vary.
Political risk – is the risk arises because of change in government policies and inter-state relationships.