Topic 06 · 4 min read
Risks of investing
All investments involve some degree of risk. In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision.
Investment risk is the chance that you don’t achieve the return you expected – including the possibility of losing some or all of your invested funds.
Types of risks
1
Market risk
- The value of investments can go up or down because of changes in the stock market or economy.
- Example: A company’s stock may fall during a recession even if the company is good.
2
Loss of capital
- You can lose part or all of the money you invested, especially in risky assets like individual stocks.
3
Lack of diversification
- Putting all money into one stock or one sector is risky. If that investment performs badly, losses can be large.
4
Business risk
- With a stock, you are purchasing a piece of ownership in a company.
- Returns from both of these investments require that the company stays in business.
- A single company’s failure can wipe out your investments.
5
Inflation risk
- Also known as purchasing power risk, this is the chance that the growth of your money won’t keep pace with the rising cost of living.
For instance, if your investments earn a 5% return, but inflation is 3%, your real return is only 2%.