Different Types of investment risks

Investors should already be aware of the risks involved with investing their money. However some new investors don't know the different types of risks. There are two main categories of risks which are:

• Systematic
• Non-Systematic

A systematic risk is associated with the markets and the general economy. A systematic risk can also be referred to as a market risk. This means there is a possibility and probability that the profit or net worth of an investment is affected negatively due to the result of international economic and security money related changes. Here are the sub categories to a systematic risk:

Interest Rate Risk
Interest rates are determined in accordance with the performance of the economy and the company where you have invested. A great example would be if you invested into the stock of a company then the annual dividend becomes the interest rate. Here the risk is that that due to the possibility that company has poor performance of inward cash flow and profits for that year have been affected. The effect is that the current stock price shares is drastically affected, and the drop affects you and your personal balance sheet, and you are not able to sell off the stock at a good profit. In the conclusion of you are stuck with a bad stock.

Inflation Risk
Inflation and continual price rise is inevitable in all economies. Inflation as a risk is based upon the investor's psychology and the general price levels. A great example would be 10 years ago you invested $10,000 into a systematic investment plan and then received the returns today. The concern is in 10 years the general price level has gone up so drastically that the value of the return is not much. The worst affected investments from inflations are securities, stocks and sometimes money market investments. When general price levels rise and interest rates drop the securities and stocks you hold now lose value.

Currency Risk
In the modern world many investments are invested into Forex and foreign currency, off shore production, etc. In such cases international events often tend to affect the currency value of our nation. For example, if you buy a China growth mutual fund whose base currency is the Chinese Yuan, and you buy it in US dollars, then any increase in the Yuan will work in your favor when you sell the investment. But if there is any decrease you will lose money on your investment.

Liquidity Risk
A successful investment is the one where you pay an amount to invest and liquidate or sell the investment at a higher value. All market related conditions, economic events, and also the risks mentioned result into situations where the liquidity value or the current market value price is less than the total amount that was initially invested. This is a risk where you are most likely to lose money.

Sociopolitical Risk
Natural disasters, terrorist attacks, wars, frauds and other unpredictable events influence market and economics worldwide. In such cases you will find that investments and securities are threatened by falling prices in the market.

Non-systematic risks are quite unpredictable and are not related to the general economy and the business environment. Non-systematic risks consist of:

Management risk
Management risk is where the management of a specific company fund where you have invested your funds takes a wrong decision that may result in loss.

Credit related risk
The credit risk is the probability that your bond is defaulted and not repaid full.
Understanding the risk of loss that can come along with is crucial. Make sure to take a look at the entire picture before investing.

---