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In the investment arena, there are certain basic types of risk that investors are exposed to. The purpose of this post is to highlight some of the general risks that all investors must take into consideration when making an investment decision. Please keep in mind that this post is for general educational purposes only and is not designed as legal or investment advice. If you have any questions concerning the information contained below, please discuss the same with a qualified professional.
Risk is defined by Webster’s Dictionary as “the chance of injury, risk or loss.” In the investment arena risk can be defined in a number of ways:
When you are establishing your financial objectives, it is important for you to consider the amount of risk that you would be willing to expose your financial plan to in order to achieve your financial goals. It is for this reason when you open your brokerage account, the account executive is required to review with you, among other things, your investment objectives, including risk. By way of example, I recently was looking at a new account document, which provided the following risk choices for the client to choose from: (1) safety of principal, (2) growth, (3) aggressive growth and (4) speculation (please note that some of these terms are also associated with the underlying investment objective). Usually these terms are not defined in the new account documents that are signed when your account is opened. Consequently, it is important for you and the account executive to have a meeting of the minds concerning these terms. Clearly, if you have a risk tolerance of growth, you don’t want the account executive soliciting your investment a speculative security.
When discussing risk with your account executive, some of the commonly encountered types of risk that will or should be highlighted are:
A direct correlation exists between risk and return: The greater the risk, the greater is the potential return. However, investing in securities with the greatest return and, therefore, the greatest risk can lead to financial ruin if everything does not go according to plan. It is for this reason that you have agreement between you, as the investor, and your account executive as to the level of risk that you are comfortable with. Also, depending on any number of factors, the risk that you are willing to take may increase or decrease with time or circumstances. In such a case, it is imperative that you communicate this change, in writing, to your account executive.
Please keep in mind that risk is not only related to a particular security or industry segment but also to the overall trading strategy that is employed in your account. If you believe that you have suffered damages as a result of broker fraud or misconduct relating to the degree of risk associated with the operation of your account, please contact the law office of Russell L. Forkey for your initial consultation.Contact Us
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