The risks of investing
Investing can be rewarding but it is not without risk. Before you start, there are a number of factors to consider.
The risks
When a company you invest in performs well, and the demand for its shares increases, you can generally expect the value of your investment to rise. On the other hand, should the company's performance decline, the shares that you hold can decrease in value or maybe even become worthless. In other words, buying shares in a company is committing to sharing both its profits and losses. Always keep in mind that all investing carries a certain degree of risk, which can result in the loss of your whole deposit, and, depending on the nature of the product, perhaps even more. Below you can read more about six different types of risk that you should consider when investing.
Market risk
Market risk correlates with the macroeconomic environment. Factors such as tax reforms, law and regulation, and global changes could impact your investments. When the overall performance of the financial markets decreases, or if there is disappointing growth, it is possible that there will be negative consequences for companies. As a result, the value of companies can fluctuate. Sentiment also plays a part in market risk. When overall confidence in the market decreases, your investments are therefore likely to decrease in value.
Price risk
The value of your investments is likely to fluctuate on a continuous basis. As an investor, you are therefore subject to price risk. Spreading your investments can partly reduce this risk.
Interest risk
Changes in the interest rate directly impact the value of bonds. If interest rates rise, bond prices typically go down. The impact of the change is dependent on the maturity date, where a longer maturity date often leads to a larger decrease in value. There can also be an indirect effect on other financial products such as stocks. If the market interest rate rises, it becomes more expensive to borrow money. This can lead to a reduction in consumption and higher interest charges for companies. In turn, the value of stocks could be negatively affected.
Credit risk
Credit risk is the risk that the company, state, or country in which you invest in cannot meet its payment obligations. With bonds, this would mean that interest will not be paid to the bondholders. Your investment will decrease in value or, in the worst case, will no longer be tradeable.
Market liquidity risk
Market liquidity refers to the ease with which products can be bought or sold on the market. In cases where there are very few buyers for a product, selling can lead to the price being driven down. Typical indicators of this are a wide bid ask spread or very low trading volumes.
Currency risk
You are exposed to this risk when you invest with a currency other than your home currency. You will receive less for your investments if the currency you invested in decreases in value compared to your home currency.
Getting started
It all starts with thinking about what kind of investor you want to be. Decide on the risk level that you are willing to take and what types of products are best suited to reach your goals. It is advisable to never invest money you need now or enter into positions which could cause financial difficulties. Also, we recommend that you stick to what you know – in other words, investing in products you are familiar with will help you handle your investments with more confidence. To learn more about the basics of investing please see our Knowledge Centre. For more information about the risks of investing, we invite you to read our Investment Services Information document Characteristics and risks of Financial Instruments.
Your investment journey starts here
Open a free account and join over 3 million investors worldwide on our user-friendly platform.
