Investment Risk

Investment RiskInvestment involves risk. Investment is about speculating what is going to happen in the future and trying to guess which investment is going to give the best future return based on market trends.

There are a number of types of risk that once analysed can help the investor best minimise the risk that will affect their portfolio. Different types of risks affect different investments – for example there are risks that affect capital and income – changes in the business environment can cause a business to not perform as well causing a reduction in company earnings.

The major types of investment risk are as follows:

  • Business: This risk occurs when due to mismanagement or poor internal controls a business performs under par or even collapses. This will affect company earnings and will affect the share price. If the company goes under you will more than likely lose your shares completely – shareholders are at the end of the list of receivers in a liquidation.

  • Financial: This risk occurs when a business gets into financial difficulty through events such as a deal not coming through or an investment that fails or being unable to generate income to pay the bills or by having an unsound financial plan.

  • Market Environment: This risk occurs through market conditions. Economic cycles, international events, share cycles or government policy can affect the success of a business and its share prices.

  • Information: This risk occurs through a businesses financial reports not reflecting a true picture of where the business is at through the company using creative accounting techniques. It is always a good idea to have an understanding of accounting or to obtain business advice before making any investments in companies based on their financial reports.

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