Types of Risk
Find out more about investment basics:
Types of risk
Although investing involves risk, there are ways to manage it.
First, you need to know the types of risk you may encounter:
- Basic Business Risk – The company whose stocks or bonds your fund has purchased may experience bad fortune or even go out of business, in which case you may lose part or all of your investment.
- Inflation Risk – The increase in the cost of living has an effect on your savings. Unless the return on your investment is above the rate of inflation where you live, you are not increasing the buying power of your assets.
- Investment Risk – With the opportunities for higher returns comes greater risk – more fluctuations in the value of your investment or, in some cases, the chance that you may lose some or all of your savings.
- Market Risk – Changes in the market may cause your units to have less value when you sell them. The stock market is influenced by many factors, including expectations about the economy and the fortunes of individual companies. The major market risk to bonds is interest rate risk, which is created by expectations of an increase or decrease in interest rates and inflation.
- Retirement Risk – It is possible that you won’t have enough money to retire, or that your savings will not be enough to see you through the rest of your life when you finish working.