Risk and Investment

Risks are inherent to investments. Investments also can be rewarding. The wise and risk ready investor knows this and is willing to play along.   He takes meltdowns and corrections, bullish and bearish market trends in his stride.  It is a well known fact that people have become wealthy overnight on the exchange and the rich have been reduced to penury on the same exchange. 

Past performances have nothing to do with future returns in this type of business. A long term investor needs to know about risks inherent in stock markets. Risks can be broadly classified as market risk, inflation risk, currency risk and business risk.

The fluctuations in prices of stocks are market risks. The fluctuation of stock prices can be attributed to many things including, expected or actual developments inside a particular industry or that of a company, change in attitude of the investor towards stock market, changes in the economy etc. Stock prices can have both upward and down ward trends and thus value of investment is affected by it.

Market risks can be mitigated.  Investors can spread out their portfolio among dissimilar industries. They can invest money in growth investments and fixed income. Alternately they can contemplate long term investments. This can be a steady investment undertaken regularly at periodic intervals. In both cases market trends will not have an undue impact on the investor.

The second type of risk associated with stock market is inflation risk. Inflation can be defined as a constant swelling of prices. This can affect the long term investor. Investment in stocks is often regarded as a means of providing against inflation. However, in practice, such investments are not secure from inflationary trends. Staying in ahead of inflation becomes impossible if the stock does not grow.

The next type of risk is the business risk. This is a risk associated with a specific business of the issuer of a stock, bond or any other investments. The value of the investment falls if the company’s product is no longer attractive to buyers. One way to reduce business risk is to diversify your investments.

The next risk usually seen in the stock markets are the currency risks. This is mainly caused by the fluctuation in prices of currency. So, while investing in stocks abroad or domestically, the investor should understand the kind of risk involved. There can always be exchange rates variations between U.S dollar and the currency of that particular country where one possesses the stock.ma

A wise investor knows his risks and tries to mitigate them in all the ways possible!

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