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Common Investment Risks Explained
June 14, 2017
Most types of high yield investments come with a variety of risks. Thus, it’s crucial that you familiarise with the common, if not all, types of risks that exist.
The following are some of the common risks linked to investments:
Inflationary Risk
Inflationary risk, which is also known as purchasing power risk, refers to the possibility that your purchased assets may lose value over time as the value of your country’s currency reduces. In other words, selling an asset after many years, such as a car may get you even less money than what you paid for today due to inflation.
To minimise the inflationary risk, it’s better to choose appreciable investment such as convertible bonds or stocks.
Market Risk
You may remember this from the copy for a mutual fund scheme. A market risk is highly unpredictable and based on factors that are usually not within the investor’s control. Examples include natural disasters, changes in interest rates, etc.
Exchange Rate Risk
Exchange rate or currency risk is a risk emerging from the change in the price of one currency against another. So, if your money must be converted into a different currency before making an investment and it’s not as powerful as it used to be in comparison to other currencies, then you won’t get the same value as you originally paid for.
Liquidity Risk
Liquidity risk is the difficulty in converting an investment into money. For instance, say you bought a house for a certain amount, and in a few years the market has gone down, but you need money for other investments. So, you may need to take a loss by selling the property at a low price. Another example is the investments with lock-in periods.