As an investor you are always worried of the risk that is associated with your investment. You know that to earn some profits from the investments you have to take some risks but still you are always worried about it. The investment risk refers to the risk that is associated with any investment. All the investments are subjected to some kinds of risks that arise because of many reasons. The investment risk can be decreased by following some rules and strategies but cannot be eliminated at all. To invest into any financial instrument the investors has to ignore some investment risks.
Types of investment risk
There are many types of investment risks that you take as an investor. The different risks with different types of investments are as below:
The risk is that the issuer of the security will default, or not repay the interest amount or the principal amount. This risk is mainly related to the bonds, fixed deposits, and other forms of certificates.
The risk is that the security is not sellable or tradable in the market, in other words, your money gets stuck unnecessarily creating an asset-liability mismatch. Valid for bonds, stocks etc.
The risk is that financial markets are volatile in nature. Volatility means sudden swings in value-from high to low, or the reverse. The more volatile an investment is, the more profit or loss you can make, since there can be a big spread between what you paid and what you sell it for. But you also have to be prepared for the price to drop by the same amount. Valid for stocks, mutual funds etc.
Interest rate risk
This is part of market risk, which is valid for all market-related debt-based investments. Depending on the interest rate movement in the economy, the rates of interest on the investment instruments may go up or come down resulting in a subsequent reverse movement of their prices, thus creating big risk in times of economic uncertainty. Valid for bonds, Govt. securities, mutual funds etc