There are several types of investment and trading risks. Here are some of the more common examples which we should consider when developing an investment strategy:
Business Risk: The uncertainty about the rate of return from an investment caused by the nature of the business. The most common types of business risk are uncertainty about sales and operating expenses.
Exchange Rate Risk
The risk associated with the conversion of the currency of one country into the currency of another country.
The risk that the value of assets or of income will be eroded as inflation shrinks the value of a country’s currency.
Interest Rate Risk
The risk that a fixed-rate debt instrument (ex. Bonds) will decline in value as a result of rising interest rates.
The risk that price changes will cause a decline in value of a company’s inventory.
The risk that an investor takes when he/she invests in an instrument that may not allow for easy exit out of the investment.
The risk of investing in other countries that may have political unrest.
The uncertainty associated with the rates of return that will be available when the coupons and principal payments from a bond are reinvested.
Repayment (Credit) Risk
The chance that a borrower will not repay an obligation as promised. See Bond Ratings to see the credit ratings of companies.
Risk factors that are common to the whole economy.
Non-market or firm-specific risk factors that can be eliminated through diversification. Also called diversifiable risk.