Types of Investment Risk and the Average Investor – South Florida Investment and Securities Risk FINRA Arbitration and Litigation Attorney:
Generally risk can be described as action or inaction that can lead to a loss of some sort. It can be reduced or eliminated based on the action taken by the person that is exposed to it.
In the investment context, there are a number of commonly encountered types of risk some of which are set forth herein. Please keep in mind that this post is being provided for educational purposes only and is not designed to be complete in all material respects. Thus, it should not be relied upon as providing legal or investment advice. If the reader has any questions concerning the contents of this post, you should contact a qualified professional.
Types of Risk:
Actuarial risk: Actuarial risk is the risk that an insurance underwriter covers in exchange for premiums, such as the risk of premature death.
Exchange risk: Exchange risk is the risk associated with such things as the chance of loss on foreign currency exchanges.
Inflation risk: Inflation risk is the chance that the value of your assets or income will be eroded over time as their value decreases because of inflation.
Interest rate risk: Interest rate risk refers to the possibility that a fixed-rate debt instrument will decline in value as a result of a rise in interest rates.
Inventory risk: Inventory risk relates to the possibility that price changes, obsolescence, or other factors will cause the value of inventory to shrink.
Liquidity risk: Liquidity risk concerns the possibility that an investor will not be able to buy or sell a commodity or security quickly enough or in sufficient quantities because buying or selling opportunities are limited. Limited buying or selling opportunities usually impact the purchase or sale price associated with the investment.
Political risk: Political risk describes the possibility of nationalization or other unfavorable government action.
Repayment (credit) risk: Repayment (credit) risk relates to the fact that a borrower or trade debtor will not repay an obligation as promised.
Risk of principal: Risk of principal describes the situation wherein invested capital will drop in value.
Risk of choice in selection of investment advisor: Risk of choice in the selection of a brokerage firm, investment advisor and/or account executive relates to the fact that, without proper due diligence on your behalf, the selection of an unqualified or low net-capital firm could cause you significant risk of loss as a result of unsuitable investment or strategy recommendations.
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