UNDERSTANDING THE RISK

Every investment there is a risk  associated, the risk of losing a money is not that far, Investing in a different investment vehicle isn’t just a game in a casino you win when you get lucky, when you are playing in a casino you are speculating, speculative investment can doubled your money at a time, but it has a higher probability of losing your money, Investing isn’t just speculating, high earning investment is risky than a low earning investment, There are many  types of investment risk, Risk is a uncertainty related to the outcome of an investments, Risk is probably deters many investors from investing in stock market, prompt them to invest in a safe bank account, CD, BOND, returns from these passive investment vehicle often lagged by the rate of Inflation, but its lessen the risk of there investment.

Business risk is a uncertainty, when a company generates poor sales and earning, For a period of time, by there nature,  there are companies that are riskier than others, If a company sales and earning decline significantly, its stocks and bonds experience downward pressure deterioration of sales and earning at worst can lead to bankruptcy, at that time if someone buy a shares of the company that is nearly bankrupt, when a company declare bankruptcy the share can be worhtless.

th Market risk, refers to the  movement of security prices which tend to move together in reaction to external event, unrelated to the company’s fundementals.

Interest rate risk, is the rise and fall of the interest rates that affect the market value of the investment, Fixed income securites such as bond, preferred stocks and real estate are affected directly, in periods of rising interest rate the prices of Fixed income securities decline to make them competative with yield to the new issue that come to the market.

th                   Financial risk is a inability of a company that cant meet its financial obligation,  Financial risk of a company is measured by its debt holds in relation to its equity, a company with high porpotion of debt relative to its assets has a high probability that a company cant meet its principal and interest obligation, the greater a debt to equity ratio, the higher is the financial risk, because the company is need at least enough to pay its fixed interest, and other obligations, if a company carries a high ratio of debt to equity it may become Credit risk or default risk at worst same as business risk it can lead to bankruptcy, by looking company’s balance sheet reveals the amount of  debt relative to total asset and equity.

Unfortunately I cant explain all risk associated in a different investment instruments  it requires a lot of pages,  along the way  you may encounter different risk such as, exchange rate risk, event risk, systematic risk, unsystematic risk, and many more, you can lessen the financial risk, operating risk and business risk  through asset diversification, by simply allocating your money  through different investment instruments or in an different companies, 3 or more is better than one and you can apply the world greatest investor simple advise, Mr. Warren Buffet,  Invest in a business you understand, make sure you understand the business you are  investing in, and prepare for the risk associated on it, since you already know some of them its time to make a contengency plan if there are some risk along your way, used your plan to take control of the situation, and lastly i want to qoute some words from Mr. Warren ‘someone setting in the shade today, because someone planting a tree a long time ago’. time is precious than diamonds, you can buy more diamonds if you allocate your time investing in the rightful way.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s