In the world of investments, a factor is always present, and you must consider financial risk before deciding what to invest your money in. No investment is safe, so any asset has its associated risks. Below we’d like to explain what investment risks exist for you to consider when you invest.
What is investment risk?
First of all, you must be clear about what investment risk refers to. It is about the volatility or change in the value of the investment, which can be down or up. The riskier an investment is, the greater the chance that the value of it will increase or decrease.
Therefore, from an investor’s point of view, financial risk is the lack of security about the future returns of his investment. In this way, there is a probability that an event with negative economic consequences will occur, where the benefits obtained are less than expected or there is no return.
What are the risk levels of an investment?
There are several ways to classify the risks of an investment; one of the most common is characterised by the exposure or level of risk that a financial investment represents, whether it is an operation with low, medium or high risk.
1. Low risk
It is unlikely to represent losses or non-payment. Some of the investments of this type can be with the government or with banks, since they are institutions with low probabilities of bankruptcy compared to other issuers such as a person or company. You must consider that this type of investment has a low risk, but also a low generation of profits.
2. Average risk
This level provides considerable returns, but it also implies a greater commitment on the part of the investment operation because it is willing to expose the invested capital more. Some assets of this type are debt or real estate bonds.
3. High risk
This level of exposure provides higher returns in exchange for assuming greater volatility. Therefore, the risk of non-payment or bankruptcy is more latent but returns tend to fluctuate more. When choosing this type of investment, it is advisable to have greater knowledge and temperament, be very active when investing, and have a loss containment strategy. Stock stocks, currencies or derivatives are at this level.
What types of investment risk are there?
There are several investment risks that you can face when making your money profitable; such risks can affect the development of your investment project; however, there are ways to reduce them and obtain good results. Here are some of the main dangers you can face:
- Systemic or market risk: War or economic disasters are examples of market-wide risks.
- Non-systemic risk: It is a risk that only affects a certain company, since it will be conditioned by a series of factors specific to each company.
- Liquidity risk: Liquidity is the ease of converting assets into cash. When investing, liquidity risk is incurred because no one will acquire such things, forcing the seller to sell cheaply and reduce his profit or loss.
- Credit risk:Known as counterpart risk or default risk. When the creditor cannot repay it.
- Legislative risk: Since governments can change or create laws that influence companies, this risk depends on them. Investing in companies in stable countries with existing legislation can help avoid it.
- Interest rate risk: It is a systemic risk that is associated with interest rates being subject to variations. It impacts all types of assets but is especially noticeable in fixed-income investments, such as bonds or preferred shares.
- Inflation risk: If an economy’s inflation rate rises, purchasing power is lost and the return on investment is negative, therefore your investment may lose money.
These are some of the biggest risks investors face, but there are others, such as operational risks from asset price drops, natural disasters, and others.
How to minimize the risk in an investment?
Investing in any investment asset puts your capital at risk. However, there are some security measures that you can apply to reduce this risk as much as possible. We share with you some of the main ones:
- Knowing the investment assets: Having more information about the assets you want to invest and learning and evaluating their profitability is the first way to minimise risk.
- Anticipate the future: Knowing country, market, and technological trends will help you create a better product handling plan.
- Diversifying risk: This is a golden rule in investments. Diversifying through a portfolio of assets that balances highly dangerous operations with the safest ones is advisable.
- Evaluate results: Carrying out an evaluation and monitoring of your results will allow you to build an increasingly effective future strategy.
- Use tools for financial risk management: There are some assets that allow you to have protection through the contracting of insurance.
Despite your efforts to decrease investing risk, you must realize that all financial instruments have some risk.
What is the risk of investing in factoring?
Factoring is a great alternative fixed-income investment with a good return-risk ratio. Invoices are relatively liquid, short-term and quite secure investment assets, with average returns of 8% to 15% per year.
If you invest in an invoice, the credit risk is with the largest company that bought items or services from the smallest, which is usually a reliable company.