There is always a risk associated with any kind of investment. Investments such as stock, bond investments, mutual funds and exchange-traded funds which can make you have made investments can increase or decrease their value. Conservative investments which the bank issues like credit unions, certificates of deposits have risks associated with them. They are linked to the market values of an increase in the cost of living index and they may not earn consistent huge returns.
At the time of investment, you will have to decide what you are going to invest in and how you will increase your financial assets. Risk is the possibility of making a profit or loss depending upon the external and internal market conditions.
Let’s consider an incidence where your value of investment is expected to increase or decrease considering the market conditions. The business risk associated with investments also influences investment values. Business decisions such as increasing business operations, merging the business with similar lines of other business and other things cause an effect in increase or decrease in business. Events of political risk and currency also have a major influence on the investments.
Importance to check risk
The element of liquidity risk makes it very difficult for survival of business. If a new business has started its operations then liquidity risk is higher. It is associated with how many investments the business has had into dealings. Diversification of risk in business is important because if all money is put under one project if it suffers loss then business liquidity risk will be higher. It can be said that risk is the possibility of making loss or gain under given circumstances.
The following are the important concepts that you should be aware of prior to making investment.
- Risk Reward
- Average volatility
- Investment timing
- Risk management
- Diversification
1. Risk Reward
The element of risk and reward are both interlinked to each other. Higher the risk, higher is the return and lower the risk, lower is the return. This concept is not universally applicable in all the given situations. The reason for this is that investors who are interested in making investments are willing to take risky investments decisions and they might also be ready to lose their entire investment meaning they are risk-prone investments.
If an investment has a higher possibility of giving returns then the risk is lesser. Having identified which investments are risk rewarding is a challenge to deal with. In the history of investments, stock investments are best to deal with which give long term returns higher. Identifying which stocks to invest in and which stocks to buy and sell is a challenging task.
Investment in corporate bonds, treasury bonds, cash or cash equivalents with Treasury bills, short term T-bills and other forms of investment vehicles are more prone for possibility of high returns.
2. Average Volatility
The past data will act as a guiding factor in historic average for decisions making regarding the element of risk. It is very difficult to predict the situations of the future specially the goal and requirements of average which are crucial factors. Even if you have the best stocks in the portfolio you will not be guaranteed higher returns and there is no guarantee that returns will be consistent over a period of time.
The purchase of stock and the sale of stock timings are the key factors which determine the returns on the investments. If the timings are favorable then the returns anticipated are good as expected and on the other hand if the timings are not favorable then returns may not be as expected by the investors.
Buying at low price and selling at the high price is what every investor will have the aim of but in reality it will not happen at all the times. The price of stock may suddenly fall or suddenly rise. It may not be possible for the investors to make the right decisions because of various reasons. This leads to losses for the investors and the average returns will be lesser and it will take a long time to recover.
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3. Investment timings
It is also important to understand that if you hold investments for a long period of time then it may not also guarantee returns and sometimes it may result in losses. Most importantly monitor the company which you are investing into, key decisions of the company, growth of the company, financial planning, investments and it should not be a surprise that one day you realize your investment company is a bankrupt company.
Monitoring investments will give you information about timings when to invest and when to withdraw your stocks from the market. Relying only on the past data may mislead investors so it is advised to look at the past data and also the present market conditions. Based on these factors you should analyse and decide the right investment timings and the investment sales timings.
Considering the realistic ups and downs of the market are important in decision making. The situation of job loss, health issues, medical care, unpredicted expenses all should be considered when you are choosing the right investment time because your fund amounts may get blocked in your investments.
4. Risk Management
You cannot eliminate the risk element. It is inevitable and all you should do is manage the risk. Following the investment strategies, you can manage both systematic risk and unsystematic risk.
Systematic risk will affect the company and non-systematic risk will affect a segment of the company. Asset allocation is one of the strategies when you make your investment into assets and build a portfolio. The investment portfolio will be into stock, bond, real estates, gold and others. The probable situation is that your investments may yield you with good assets which will give good returns.
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5. Diversification
Diversification of your investments is a way in which you will divide your entire money into different asset classes. It will provide you with a facility to divide your money into different assets and you will not put all the eggs in one basket.
Take away
It is evident that all the investments will have some element of risk. Understand the investments, associated risks and take appropriate steps to manage the risk. By doing these basic investment steps you will be able to be in a good financial position and also meet financial goals.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
