Investing in the stock market can be a great way to build wealth and provide financial security for the future. However, it is important to understand that investing comes with risks. Knowing what types of risks are involved and how to manage them is essential in order to make sound investment decisions.
Investment risk is the chance that an investment will lose money or not perform as expected. There are several types of risks associated with investing and it’s important to understand them before investing your hard-earned money.
The most common types of investment risk are market risk, credit risk, inflation risk, liquidity risk, and volatility risk.
Market risk is the risk that investments will decline in value due to changes in the economy. This type of risk is inherent to all investments and cannot be eliminated. However, diversifying investments can help to reduce the impact of market risk. The more investments are spread, the lower the impact of one failure.
Credit risk is the risk that the issuer of a security will be unable to pay interest or return the capital on that security. This type of risk is most common with fixed interest bonds. Some bonds (e.g., government bonds) are safe, while some company bonds are riskier.
Inflation risk is the risk that the value of an investment will decline as a result of rising prices. This type of risk can be managed by investing in assets that have the potential to increase in value faster than the rate of inflation. Unfortunately, there is no free lunch, and the investments with the highest growth potential have the highest risk of failure.
Liquidity risk is the risk that an investment cannot be sold quickly if needed. This type of risk is more common with less liquid investments such as property.
Volatility risk is the risk that the value of an investment will fluctuate significantly. This type of risk is inherent to all investments and more usually stocks and shares, and often cannot be eliminated.
Working with a qualified financial planner can help to ensure that your investments are properly diversified and that you understand the risks associated with each investment. Understanding the risks and having a plan to manage them can help to ensure that you are able to achieve your financial goals.
Get in touch with Charterhouse Financial for a no obligation, initial consultation with no cost attached.
01782 479966
