Introduction to Investment Risk Factors:
The risk of investment is states as the uncertainty or probability of losses compared to what is expected in terms of profit from the investment. Due to some sort of fail in the set prices of securities such as stocks, bonds, real estate and other things increase the factors of risks in the process of investment. In addition to that it can also be stated that each sort of investment is exposed to some sort of investment risks like the risks in the market where the there can be loss on investment and that never returned back to the investor.
Types of Investment Risk Factors:
There are different risks factors in the process of investment which are going to discuss as follows:
Market Risks:
The values of any investment can declines due to certain negative events and economic development in the whole market. The main consideration towards market risks are interest rate risks where there is a risks of losing money due to changes in the rate of interest. Along with that equity risks are there where the share’s market price varies depending on the supply can demand factors. The currency risks is another factor in market risks where there is a risks of losing money due to movement in the rate of exchange.
Credit Risks:
This is another sort of risks factor where an organization issues the bond which will run in the difficulties of financial terms and won’t be able to return back the interest of the principle at maturity. The risk of credit is used to applied to the investment of debt such as bonds and an organization can evaluate the credit risks by looking at the ratings of credit in the bond.
Liquidity Risks:
This is another risk where an individual or an organization is unable to sell the investment a reasonable price and get the money out where they want to. In order to sell the investment an individual needs to accept at certain lower rate and in sort of some case such as the investment in the exempt market it might not get possible to sell the investment at all.
Inflation Risks:
The risks of inflation occurs where there is a risk of loss based on the power of purchasing as the values of investment does not goes with the rate of inflation. This risk of inflation is relevant if an individual owns debt or cash investment like bonds.
Reinvestment Risks:
The risks of reinvestment are when there is a risk of loss from the principle or income of reinvesting a lower rate of interest. The risks of reinvestment will not be applicable if an individual is intended to spend the regular payments of interest or the maturity principles.
How to Avoid Investing Risk Factors:
There are different ways about risk the risks factors of investment can be avoided or reduced and those processes are going to discuss as follows:
- By establishing proper financial and personal goals an organization or individual can make it easier to decide on where to invest. In short having a proper goal for investment is necessary to avoid any sort of investment risks factors. In terms of long terms if an individual is willing to go for higher risk, then they can have a investment where they will have a belief that even if investment rate drops then stills there is a chance of returning back with increasing value.
- Keeping an close eye in terms of monitoring the investment is also a key consideration to avoid the risks factors. Even if an organization or an individual work on prior research before investment, still they needs to have continuous monitoring on the investment. Keeping track on the dividends and tracking the performance level of the investment is necessary to ensure that the investment in running properly in the business environment or market. With keeping an investment goal in mind, an individual does not need to be afraid of adjust the portfolio of investment when there is not any positive contribution towards the strategy of investment.
- By using different software tools that are available in the market a business organization or an individual with investment can ensure about meeting the objectives of tracking the ups and downs of the investment process.
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Tools to Control Financial Risk:
There are certain tools and methods that can be taken into account for controlling the financial risks which are stated as follows:
- Regression analysis: This is one of the methods that is utilized to study the impact on one variable when there is a change or modification on the other one. An example can be effective to understand that such as based on the decreasing or increasing manner of interest rate what impact will be there in the cash flow can be analyzed by using regression analysis.
- Risk Audit: If an organization or an individual can work on identifying and auditing the risks before it happens, then there is a broad change of reducing or controlling the financial risks. The financial managers can facilitate the audits of risks to ensure about the effectiveness of risk responses and accordingly changes can be taken into consideration.
- Scenario Analysis: This is another effective method in quantifying financial risks. It can also be considered as sensitivity test, stress tests etc. Financial managers can create scenario based on the sources such as if any wrong happens with one process then what are the alternatives that can be taken into consideration.
How do you Manage Investment Risk?
In order to manage investment risks there are different ways such as diversification where investment can be spread into variety of assets with the objectives that a portfolio of correlated assets do not move in the same way at, rather it can have different degrees. This can help in giving something and the risks of overall risks in reduced and in the marketing the investment can have better position in terms of ups and downs. In addition to that by distribution the investment in asset allocation is another consideration towards managing the investment risks.
