In the world of investments, there is a factor that is always present and you must take it into account before deciding what to invest your money in financial risk. No investment is totally safe, so any asset has its associated risks. Below Global Commercial Capital Investment Group experts explain what types of investment risks exist for you to take into account when investing.
What is investment risk?
First of all, you must be clear about what investment risk refers to. This is the volatility or change in the value of the investment, which can be down or up. The riskier an investment, the more likely it is to rise or fall in value.
Therefore, from an investor’s point of view, financial risk is the lack of certainty about the future returns on your investment. In this way, there is a probability that an event will occur with negative financial consequences, where the benefits obtained are lower than expected or there is no return at all.
What are the risk levels of investment?
There are several ways to classify the risks of an investment, one of the most common is characterized by the exposure or level of risk that a financial investment represents; that is, if it is a low, medium or high-risk operation.
1. Low risk
It is one that is unlikely to represent losses or non-payment. Some of the investments of this type can be with the government or with banks since they are institutions with a low probability of going bankrupt compared to other issuers such as a person or company. You must take into account that this type of investment has a low risk, but also a low generation of profits.
2. Medium risk
This level provides considerable returns but also implies a greater commitment on the part of the investment operation since it is willing to expose more of the invested capital. Some assets of this type are debt or real estate bonds.
3. High risk
This level of exposure provides higher returns in exchange for assuming higher volatility. Therefore, the risk of non-payment or bankruptcy is more latent, but returns tend to fluctuate more. When choosing this type of investment, it is advisable to have greater knowledge and temperament, as well as be very active when investing and having a strategy of loss containment. At this level are stocks, currencies, or derivatives.
What types of investment risks are there?
There are a number of investment risks that you may face when making your money profitable; said risks may affect the development of your investment project; however, there are ways to reduce them and get good results. We present some of the main risks that you can face:
Systemic or market risk: This is a type of risk that directly affects the market as a whole, regardless of the companies in which it is invested or the sector to which they belong. For example, wars or economic crises.
Non-systemic risk: It is a risk that only affects a certain company since it will be conditioned by a series of factors specific to each company.
Liquidity risk: Liquidity is the ease with which an asset is converted into money. By investing, you assume a liquidity risk, since it is probable that no buyer will be willing to acquire said assets when they are put up for sale; therefore, the seller will have to sell cheaper, which will reduce his profit or bring him losses.
Credit risk: It is also known as default risk or counterparty risk. It is when the entity to which the credit has been granted is not able to return it.
Legislative risk: It is a risk that will depend directly on governments since they are the entities that have the authority to modify or create laws that may affect companies. One way to avoid this is to invest in companies with operations in stable countries and with legislation that is already in force.
Interest rate risk: This is a systemic risk that is associated with changes in interest rates. It impacts all types of assets, but it is especially noticeable in fixed-income investments, such as bonds or preferred stock.
Inflation risk: In the event that the inflation rate of an economy grows, there is a risk that it exceeds the profitability of your investment since purchasing power is being lost and the return on investment would be negative and therefore, purchasing power would decrease.
These are some of the most important risks that you can face as an investor, but they are not the only ones, since there is another series of operational risks, due to falls in asset prices, derived from a natural catastrophe, among others, that can influence the results.
How to minimize the risk in an investment?
Investing in any investment asset puts your capital at risk, however, there are some security measures that you can apply to minimize this risk. We share some of the main ones:
Know the investment assets: Having more information about the assets in which you want to invest, as well as knowing and evaluating the return they offer you is the first way to minimize risk.
Anticipate the future: Being informed about the changes that are taking place in the country, the market, technology, etc., will allow you to build a more comprehensive strategy that will help you decide on the management of your products.
Diversify risk: This is a golden rule in investments. It is advisable to diversify through an investment portfolio that balances highly dangerous operations with the safest ones.
Evaluate results: Carrying out an evaluation and monitoring of your results will allow you to build an increasingly effective future strategy.
Use tools for financial risk management: There are some assets that allow you to have protection by contracting insurance.
Despite the measures that you can apply to reduce the risk in an investment, you must be clear that there is no financial instrument without risk, which means that all investments include a risk, even if it is minimal.
What is the risk of investing in factoring?
Factoring is an excellent investment option because it is an alternative fixed-income asset with an attractive risk-return ratio. Invoices are relatively liquid, short-term, and fairly safe investment assets, with average returns of 8% to 15% per year.
When you invest in an invoice, the credit risk is with the larger company that bought goods or services from the smaller company, which means that the debtor company is usually a solid company with good payment history, so there is talk of reasonably low risk.