What are The Risks of Financial Investment?
It is known that investment of all kinds carries a certain amount of risks, especially the risks of financial investment.
For this reason, everyone who intends to enter the field of investment should anticipate the risks as well as expect to achieve a material return.
As there is no type of investment that has complete protection from falling into risks, and below we will first define the concept of risk.
What is the definition of risk “concept of risk”?
Risk is known in its simplest definition, as it is the expectation of a higher amount of profits than what is actually achieved after investing in the project.
As a result, there is a difference between the profit expected to be achieved before starting the activity and what was actually achieved after entering into the investment.
As a result, what is called risk occurs, in which more than one definition was mentioned.
Some of them expressed it as the inability to achieve the amount of profits that were expected to be achieved from this investment.
Some also said in the concept of risk, that it is the decline of the achieved return from the expected return, as the risk ratio is determined on the percentage of the expected return difference from the investigator.
As the smaller the difference between the expected profit and the one actually achieved, the lower the risk will be until it reaches zero.
This happens in the event that the achieved profit is equal to the expected profit, and in order to understand the concept of risk more clearly, there are types of risk that you must know.
In order to know everything related to the risks of financial investment, and the most important of these types are two:
Types of financial investment risks
Risk occurs when the return achieved from the investment is not equal to the return that was expected from it.
The risk in financial investment is like any other investment, as it contains more than one type, and below we will list them.
Hence, investment risks can be divided into two main types, and the rest of the types fall under them, namely:
*.Regular risks
This type of risk is general, meaning that it is not specific to a specific company.
But it happens to any company or project, regardless of the nature and terms of reference of this project.
As it results from variables that you have no hand in changing or that you do not have the ability to curb or control, as they are restricted by global variables.
For example, the political and economic conditions surrounding the country, and therefore it was difficult to avoid these risks.
It also affects a huge range of activity assets, and also cannot be curbed by the difference and diversity in the investment portfolio.
*. irregular risks
These risks are characterized as having a special character, meaning that they may pertain to a specific company and not to other companies, and therefore due to certain circumstances that occurred to this company.
An example is the occurrence of a short circuit in a specific part of the company.
It can also be controlled through the difference and change in the investment portfolio, and therefore it can be easily overcome and avoided.
This is because it is related to the company itself to the exclusion of others, and the risks also affect a very small percentage of the assets of this company.
Managing financial investment risks and how to reduce them
Since entering the field of investment needs good management, which results in good planning for profit rates and risks in the activity.
Therefore, some investors have devised some methods that protect or work to reduce the percentage of these risks, including:
1. Financial investment on a regular basis
Where it was found that when the investment is made at a certain rate at regular intervals periodically, it may reduce the risk potential.
In the sense that if the purchase is made at a time when the stock price is low and the sale is when the price is high, it may reduce the risk.
As it is known in the trading market is the periodic change in stock prices, which helps to achieve greater profits i.e. lower risk rate.
Thus, the average price of investing in stocks at this time is less than its price if the investment was made all at once without the continuous presence.
2. Diversity
Since if the investor diversifies in the shares of his investment portfolio, his risk rate will be less than if he invested in one type of stock.
And this must happen to a reasonable extent and without exaggerating the diversity, which gives him the ability to follow his investment stocks without hindrance.
3. Long-term financial investment
As there may be changes that lead to a decline in the financial investment market and a drop in its prices.
Therefore, the distinguished investor had to plan for the long-term investment.
Since it was known recently that it is normal for the price of stocks to increase over time, but some variables have occurred that may change expectations.
As a result, financial investment risks occur.
This is why it is desirable to invest for the long term, which is what a good investor does.
And so, dear reader, we have finished this article, which included some important points related to the risks of financial investment.
And also how to overcome and manage it.