What is risk explain various types of Investment Risk
In buisness work every investors involved some percentage of risk for the whole period of till money invested in business work. Investment risk means some chance of financial loss going to happen and uncertainty of business investment decision.
Risk is a form of uncertainty which can happen suddenly uncontrolled in business and causes small loss or complete loss of investment. Risk included probability of losing some or complete investment.
Financial definition of risk can be written as chance outcome which investors get after doing investment during investment period which may differ from expected return or outcomes.
Every type of investment done by investors in any buisness field working involved different types of investment risk. All savings and products made in buisness consists of different types of risk and returns obtained from from different product also keep changing.
Mostly investment risk dependent on several factors like how fastly investor get his money back when he want, how fast investors money start growing, and how safe investors money after investment in any business.
Buisness work we all know that full of uncertainty which means there is equal opportunity cost of getting profit or more than expectations profit after selling of goods and services of any company and just opposite of it equal chance of any business going to loss.
Buisness working always shows votality in way full of up and down growth and best example of investment risk can be clearly find out after seeing share market working.
Inside share market investors from all over world investors invested there money on different categories of buisness company according to their requirements and demand. Investors always keep close eyes on shares market up and down.
Here in this example share market involved subject to market investment risk because if share market working positive in favour investors then it can provide huge profit but if share start working negative means against investors expectations then it will bring huge loss and in many case investment money never come back.
12 Types of investment risk
There are mainly 12 types of investment risk involved in any type of investment in business such as interest rates risk, liquidity risk, market risk, currency risk, credit risk, concentration risk, political risk, reinvestment risk, systematic risk, equity risk and longevity risk and foreign investment risk.
Market investment risk
Market always working with full of financial risk because there can be chance of getting profit and also loss in buisness. Inside market investment risk included like suddenly decline in market price and value of any company products which results huge loss to company business.
Lets take example suppose buisness company manufactured any automobile in larger number but due to any other factors price decreases of that manufactured automobile product. This will result in bringing heavy loss to that particular company. Company have to sale his automobile product in less market price.
Equity investment risk
Equity investment risk is one of important type of marketing risk. These types of investment risk deals with investment on share. We all know that share of any company keep changing time to time.
Share price inside market of all companies keep showing increase and decrease in its quality or value. Increase and decrease in market price of share of any company totally dependent upon demand and supply.
Equity investment risk can be defined as type of investment risk which helped to study financial loss occurred due to sudden decrease in market price of share.
Interest rate investment risk
Interest rate risk means all types of uncertainty which are related with interest earned by money lenders (banks, etc) after repayment of money. Interest rate risk is one of the important type of investment risk which are study inside market risk.
These types of investment risk helped to study debt investment risk like bonds etc. Lets understand interest rate risk with an example suppose price of bond changes which results in loss of money. Suppose market value of bonds goes up which will result in decrease price of bond.
Currency risk
Currency risk one of important type of investment risk which study together with marketing risk. Currency risk applied in case of foreign currency investment. Lets understand with an example of currency risk, suppose buisness company done any foreign transaction in foreign currency and after completing transaction company get to knew that exchange rate changes of foreign currency.
This sudden change in exchange rate of currency bring currency investment risk in notice of investors.
Another example of currency risk, suppose US dollars become less valuable in comparison with Kuwaiti Dinar, then this will result in your stocks in US dollars become worthless in front of Kuwaiti Dinar currency.
Liquidity risk in investment
Liquidity risk occurred in investment when any company, investors and buisness doesn't find right market to buy and sell their products and services. These types of investment risk refer to investors won't find right market for theirs securities and prevent them from buying and selling of their goods and services when they wants.
In liquidity risk of investment marketing company unable to buy and sell their products and services in reasonable price. Marketing company and investors (you) have to accept lower price.
Liquidity risk occurred in case of more complicated product of investment and charges penalty in early withdrawal.
Concentration risk
Concentration risk occurred in investment when investor totaly focused in one investment. Concentration of of investor in one investment increases chance uncertainty of getting loss if any increase and decrease occurred in time investment accounting period.
To reduce concentration risk investors have to diversify his investment money in various types of investment. Diversify of investment will reduce chances of occurrence of concentration risk.
Credit risk
Credit risk is important type of investment risk which is applied on bond credit issued by company or government. Financial difficulty and unable to repay principal at maturity.
Rating of any bond can be used for evaluating credit risk. Let understand with help of example of credit risk, suppose bond issued by United States government have bond rating of AAAA, which means this bond have high ratings and low chance of credit investment risk.
Reinvestment risk
In reinvestment risk occurred in investment when investor have to do again investing principal amount at lower interest rate. Lets understand reinvestment risk with help of example, suppose you buy any company bond at 10 percent interest rate but suddenly interest rate of your bond decrease to 6 percent.
This will result reinvestment risk to you make repayment of principal amount of investment at reduced interest rate.
Foreign investment risk
Investors when do their money investment in any foreign country have generated foreign investment risk. Lets take help of example to understand foreign investment. Suppose investor have invested their hard earned money in companies of foreign countries. There are sometimes risk of company can be fraud and given wrong address.
In foreign investment is type of risk which investors have to deal with after doing investment till investment period. Another investment risk generated in form of foreign investment are of taking nationalization.
Public risk insurance
are one of the important type of investment risk. Public risk insurance provided protection cover to investors of small, medium and large size. Public risk insurance taken by buisness decision makers, investors and people to get protection cover from large range of financial risk.
Major investment risks covered like poverty damage caused of peoples and health damage caused. Best example of public insurance risk covered by health insurance.