Types of investment risks

In the previous lesson, we mentioned the concept of risk-taking and risk aversion. And with a simple diagram, we explained the difference between risk-taking and risk-averse people. In this lesson, we are going to introduce the types of risks that an investor faces in buying company stocks and investing in the stock market.

Labels: Order to build a Forex robot , Build a stock trading robot , Build a trading robot , Trader robot design , Free Forex Robot , Forex robot programming , Forex Expert Making Tutorial , Build a trading robot with Python , Download Forex Trading Robot , Buy Forex Trader Robot , Automated Forex Robot , Free stock trading robot , Learn how to build a Forex trading robot , Alpari trading robot , Forex robot for Android , MetaTrader robot design , MetaTrader robot programming , Forex robot design , Forex robot programming , Automated trading

Risk is divided into two general categories:

1- Avoidable risk

2- Inevitable risk

Avoidable risk

A risk that can be avoided by using some methods. These types of risks are called non-systematic risks. These risks are often due to the specific characteristics of the company. For example, suppose you bought a company stock. If the company’s management is weak, the company’s shareholders do not act properly, or the company does not succeed in competing with other competitors, or perhaps due to the obsolescence of the company’s products, the company’s customers will gradually decrease and its sales will decrease. Risks are avoidable. Unsystematic risk is often of internal origin and the cause is within the company. Given that this type of risk can be minimized by using some methods, it is called avoidable risk.

Inevitable risk

The second category of risks that investors face are risks that the investor has no control over. These are called systematic risks. Items such as changes in inflation, macroeconomic policies and political conditions are beyond the control of the company. For example, a change in macroeconomic policies and an increase or decrease in the exchange rate or inflation rate can directly affect the income, cost and profitability of companies and naturally affect the value of their stocks. This group of risks is called systematic or unavoidable risks because they are beyond the control of the investor.

But how can the avoidable risk be minimized?

Notice the famous saying, “Do not put all your eggs in one basket!” If you are asked what the logic of this proverb is, you will all answer that this will reduce our risk because if one of the egg baskets falls to the ground and its eggs break, the other baskets and eggs will still be healthy. like the.

In stock-related topics, there is a very famous theory called basket theory, which is based on this proverb. According to this theory, the investor can minimize the avoidable risks in his investment by diversifying his investment portfolio and choosing very diverse assets instead of one or more limited assets. Therefore, the more diverse the portfolio, the lower the investment risk.

Based on portfolio theory, capital market experts recommend that instead of buying one or more shares of a limited number of companies, they buy stocks of various companies from different industries, and even in their portfolio, risk-free securities such as Have participation papers and other items as well. But again, by diversifying the portfolio, we can only minimize avoidable or unsystematic risks, and systematic and unavoidable risks are out of the investor’s control, of course, by eliminating or reducing potential risks. Avoidance In practice, most of the risks faced by the investor are completely reduced.

We hope you find these topics interesting and useful. However, the issue of risk is one of the main issues in investing and can not be ignored.

Types of investment risks

So far, we have explained the two main categories of risk and said that according to this classification, some risks can be avoided by investors, but the control of some risks is beyond the control of investors. The risks of the first group are called avoidable or unsystematic risks and the risks of the second group are called unavoidable or systematic risks. But in this lesson we want to classify the risks from another perspective. According to this classification, there are seven major types of investment risks, which we will mention below.

1- Interest rate risk

Suppose you want to choose between buying bonds with a fixed interest rate of 20% and buying stocks with an expected return of 30%. If you are willing to take a risk, you will probably choose to buy stocks because you expect them to return more. Now suppose the central bank decides to increase the interest rate on participation bonds from 20% to 30%. What happens in this case? While you expect to get 30% return by accepting risk and buying stocks, someone else can buy new bonds without taking any risk and get the same 30% return, of course, as a guarantee. In this case, you are actually facing a new risk, which is interpreted as interest rate risk.

2- Inflation risk

Suppose the annual inflation rate is 15% and you bought a stock that you expect to return at least 40% by the end of the year. Given this amount of inflation, a return of 40% is desirable for you because it is at least 25% higher than the inflation rate. Now, if for any reason the annual inflation rate rises from 15% to 30%, it is natural that a 40% return may no longer be desirable for a risky investment such as buying stocks, because even assuming a 40% return on stocks, Prices are rising so much that the rate of return is no longer attractive to a venture capitalist. The risk of rising inflation is called inflation risk.

3- Financial risk

If the company whose shares you are buying has received a large amount of loans from the bank, it will naturally have to repay the principal and interest received to the bank within a certain period, so it will face many obligations. The higher these liabilities, the greater the financial risk of the company, and thus the shareholders of such a company are exposed to a higher risk.

4- Liquidity risk

As mentioned earlier, one of the most important features of a good asset is that it can be quickly converted into cash. Suppose you bought the company’s stock last year and now you need cash, but due to the company’s poor performance, the stock buyer will not be able to buy it quickly. In this case, you run the risk of being liquidated. Of course, most of the time you can sell your stock at a slightly lower price, but this may not be to your liking.

5- Exchange rate risk

Exchange rate is one of the issues that directly affects the position and profitability of companies. For example, suppose the company whose stock you bought buys most of its raw materials for production abroad. When the exchange rate rises, the company has to pay more for the import of raw materials, and naturally as the company’s costs increase, its profitability and consequently its stock price decreases. Therefore, exchange rate fluctuations are considered by investors as one of the investment risks.

6- Political risk

Instability in the political situation that harms the country’s economic issues directly affects the performance of businesses in that country. As a country’s political and economic instability increases, the performance of enterprises becomes more difficult. And these problems lead to a drop in their stock prices. This risk is called political risk or so-called country risk.

7- Business risk

Imagine buying shares in a local car company. Prior to this, the government had set a very high tariff for the import of foreign cars, so that, for example, a car worth $ 10,000 abroad is sold at a price of over 100 million tomans at home. In such a situation, domestic cars have many customers due to their low price. Therefore, domestic automakers have acceptable sales and profitability. Now suppose the government greatly reduces car import tariffs. What do you think is happening? Naturally, the price of foreign cars is closer to the price of domestic cars, so the power of choice of customers increases, and in such circumstances, a group of customers may prefer foreign cars, and thus the sales and profitability of the automotive industry decreases. This risk, which is actually related to a particular industry, is called business risk.

We hope you enjoy knowing these divisions. It seems that in these last few lessons we have learned enough about risk and its types. But do not worry, in the following sections, we will show you interesting and easy ways to minimize the investment risk.

Types of investment risks