No matter whichever kind of investment you are thinking to make in stock market, if you are looking to create some real wealth, some kind of risks will surely be attached to it.
According to Warren Buffet: “Risk comes from not knowing what you’re doing”
So, in this video we will discuss different types of risks which our involved when we invest in the stock markets:
First of all, let us know what investment risk is:
Investment risk is the risk which measures the uncertainty of receiving returns according to the expectations of the investors.
In investments, risk has a positive relationship with returns, the higher the risks, the higher return. For example, investing in Public Provident Fund (PPF) is safer than investing in the stock market. But one should also note down that PPF gives us only 7% p.a approx whereas the stock market can give us a double digit return say 1215% approx may be.
Having understood about investment risk, now let us discuss about the types of risks:
Types of risk involved in the investment:
When the government or any company which issues bonds starts facing financial difficulties and are not able to pay principal or interest, then it is known as the credit risk.
This kind of credit risk is mainly applicable to debt instruments.
We can also evaluate this kind of risk through analysing the credit score given by the credit companies.
When we are unable to sell our investment at the current market price of that investment tool then it is known as liquidity risk.
When we sell our investment at a lower price than the fair price, then this kind of risk arises.
Usually when we invest in real estate then this kind of risk mainly arises and we have to sell it at a lesser price.
When our investments decline its value due to some events which affects the whole financial market then it is known as the market risk.
The market risk can be equity risk, currency risk or interest rate risk depending on the investment tool in which you are investing.
This type of risk arises when we concentrate our money only in one type of investment tool
Diversifying our money into different investment tools helps us in reducing risk.
When we reinvest our principal at a lower interest rate then it is known as the reinvestment risk.
Suppose we invest in a bond at 6% and after the maturity we decide to reinvest that maturity amount.
But we then reinvest it at 3%, i.e reinvesting at a lower risk, then reinvestment risk arises.
Inflation mainly means decrease in the value of our purchasing power over the time.
When our investment returns are not able to keep with the increasing rate of inflation then it is known as the inflation risk.
Having discussed about different types of risks, one should properly evaluate risks involved in all types of investment and then only start investing.
If you have already made your investments, then review those investments and see if that you are comfortable in taking those kind of risks.
Thank you for watching the video.
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