Understand Your Investment Risk

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All investments involve some risk, and a clear understanding is required for the client to manage these risks properly.There are several types of risk.
I. Systematic risk
All businesses experience some economic reversals. Therefore, market risk is a systemic risk that the value of the investment may suffer from some economic, political or social change.

II. Unsystemic risk
Financial and default risk of an individual company are considered to be unsystemic risk.Quality of management, ability to offer better goods and services for a profit including control costs and meet competition all will help in reducing the risk.

III. Financial risk
Some company may not perform as well as expected, or may fail and go bankrupt. That is financial risk if you invest in those companies.

IV. Default risk
This is a risk if the issuer of a bond or debenture can not be able to repay the loan. In the event of bankruptcy, secured creditors come first, shareholders second. If the security pledged has declined in value, it may no longer be sufficient to satisfy the claims.

V. Interest rate risk
The interest rate risk is associated with fluctuations in the interest rate and how it affects the investment. There are a few ways the interest rate can affect the investment
a) If the interest rate rises, bond prices will drop if sold before maturity.
b) If a fixed interest rate security is held, it protects the investment against falling interest rates and it also locks in the investments for the lower rate when the interest rate rises. Bonds are highly subject to interest rate risk.

VI. Marketing risk
A “marketability risk” occurs when a buyer cannot be found at the time the investor wants to sell.
1. No market
Company has gone out of business.
2.Thin market
Poor exposure or reversal.
3. Active market
Everybody wants a piece of the security.

VII. Exchange rate risk
foreign investments are subject to an exchange rate risk. If an investment is denomination in foreign currencies and the domestic currency falls, the foreign investment value increase.

VIII. Inflation risk
Inflation erodes the purchasing power of an investment so that over time it declines in real rate of return.

I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:

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