Learn Investment Risks – Stock Investment Risk and Forex Risk2 min read
Generally, investing in stocks can generate higher returns than bonds and real estate. However stocks carry certain investment risks. A successful investor should learn about the different types of investment risk.
Stock Investing Risk:
One of the biggest risks for investors in stock market is the economic risk. Bad economy can seriously affect stock market prices and turn against your investment.
Investing in stocks is subject to business risks. Your investment can literally go to zero if your chosen company goes out of business or bankruptcy, but you can reduce this type of risk through diversification. If you are properly diversified and invested in a wide variety of stocks, the risks associated with might be controlled or reduced.
If you are investing in new or small companies you might be experiencing growth stock risk. Growth stocks are very sensitive to the fluctuations in interest rates. Any bad news about the company can dramatically decrease the stock price.
Managing foreign exchange (or forex) risk is essential to successful investment in the forex market.
Foreign exchange exposure or risk can be classified into three types: transaction, translation and economic exposure.
Transaction exposure refers to the extent to which the future cash transactions of the firm may be affected by any changes in the currency exchange rate.
Translation exposure refers to accounting exposure. It measures the impact of changes in exchange rate on the financial statements of the group of company.
Economic exposure measures the impact of changes in exchange rate on the firm’s cash flows and earnings.
Most companies attempt to minimize the risk of fluctuating exchange rates by using hedging instruments such as Forward Exchange Contracts, Money Market Hedge, Futures, Options and Swaps.