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Understanding Investment Risk

Investment Risk: Definition, Types, and How to Prevent It

Example of investment risk, GIC Trade - For investors like you, investment risk itself refers to the level of uncertainty or potential for financial loss that is closely related to investment decisions. In other words, when you dare to invest the money you have, you don't know for sure whether the money will return as expected or whether you will actually get a loss that could not be predicted before. Investment risk does not only come from stock market movements, it can come from the economy, the length of investment time, and many other things that have the potential to cause investment risk. Investment risk is defined as the potential or possibility of loss of the expected results in the investment you choose. Risk is the most important component in assessing the expectations of an investment. Most investors when carrying out these activities assume that the smaller the risk that occurs has a profitable opportunity, the smaller the investment risk, the more profitable the investment they invest. However, in practice, the higher the risk, the better the deportation or return that investors will get. [caption id="attachment_23468" align="aligncenter" width="1024"]

example of investment risk[/caption] As one example of investment risk, the value of your investment may rise or fall due to stock market conditions. The company will make a decision, whether to expand the business area or you will join another company, so this will affect the value of your investment. If you are doing overseas or international investment activities, then events in that country will also affect the investment you are doing (political risk or currency risk).

9 Types of Investment Risk

  • Market risk
This risk of experiencing a decrease in investment value can occur due to a developing economy or other events that can affect market movements. Market risk consists of 3 types of risk, such as interest rate risk, equity risk, and currency risk.

10 Best Investment Applications in Indonesia and Trusted by OJK

  1. equity risk - applies to stock investments. Variable stock market prices result in the risk of loss due to falling stock prices.
  2. interest rate risk - applies to debt securities (bonds) investments. This is the risk that occurs when money is lost due to changes in interest rates. For example, when interest rates rise, the value of bonds or debt securities will fall.
  3. currency risk - applies to you as an investor when making foreign (international) investments. This risk will occur in currency exchange rates. For example, the US dollar (USD) is worth less compared to the Canadian dollar (CAD), then the US0 stocks you invest in will be worth less in Canadian dollars.
  • Liquidity risk
In this liquidity risk, you cannot sell your investment at a normal or fair price, nor can you withdraw money when you need it. To sell it, you need to accept a price reduction, and in some cases, market investment is excluded.
  • Concentration risk
The risk of loss that results from your invested money is concentrated in 1 investment. When you diversify your investments, you have spread the risk across various investments to their geographical locations.
  • Credit risk
This risk occurs when a government agency or company that issues debt securities will experience financial difficulties and cannot pay interest when due. This risk applies to debt investors.
  • Reinvestment risk
The risk of loss that comes from investors reinvesting their income at a low interest rate level. For example, you buy a bond paying 5%. This risk will affect you if there is a decrease in interest rates. This risk does not apply if you intend to buy payments of principal or regular interest when it is due.
  • Inflation risk
Inflation risk is the risk of loss of purchasing power by investors because the value of your investment does not follow the inflation rate. It is important to note that inflation reduces the purchasing power of money over time and the same amount of money will buy fewer goods and services. Real estate offers investors protection from landlords who can raise rents.
  • Horizon risk
Horizon risk is a type of risk where your investment period can be shortened at any time if an unexpected event occurs, such as losing your job. This event allows you to sell your investment. When you have to sell stocks when the market is down, you will lose the money you have invested.
  • Longevity Risk
This risk is of a savings-draining nature and is very significant for people or investors who are in retirement or approaching retirement.
  • Foreign investment risks
This investment risk is the risk of loss when you invest abroad. When spending international investments, such as stocks in emerging markets, you will face risks that your chosen country does not have, such as the risk of nationalization.

Stock Analysis: Definition, Types, and Applications

Above is daily information about investment risks. Keep updating the latest information through the GIC journal which will be announced every day. You can also trade on the GICTrade application with its latest feature, an ECN account, enjoy the advantages of the latest features with the lowest spread starting from 0! Also follow the GIC Gebyar Hadiah and get attractive prizes in it from GIC worth billions of Rupiah without a draw!

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