Types of Investment Risk
What are the different types of investment risk? If you're a novice investor you may be surprised to know how many
different types of risk are associated with different types of investments. Risk is even tied to money market investments
and savings.
The list that follows is not an exhaustive list of every type of investment risk, but rather the more common ones that
you should definitely know.
Market Risk – This is the obvious one. This is the kind of risk associated with rapid market movement. You never know
when the market is going up or down, and if you're caught in a down market you can lose money in your investment. This
will generally affect stock investments or any type of investment that involves heavy speculation.
Business Risk – the risk of doing business in a particular environment, or the risk of how business decisions affect
stock prices.
Inflation Risk – This type of risk is prevalent in money market account and savings accounts. This is the risk that
your investments return will be diminished by inflation in the economy. For example, if interest rates are increasing
at 3% a year but your savings account returns 1%, you are actually losing 2% a year in investment returns. This is
sort of a "hidden" risk that many investors who are too conservative don't think about.
Credit Risk – If you invest in bonds or other types of “IOU” investments, credit risk is one you need to be aware of.
This is the risk that the issuer of the bond will default on their credit obligations in which you won't get your money
back.
Interest Rate Risk – This is especially prevalent in bond and money market investments (though it works in opposite
directions). It's the risk associated with the level of returns received on an investment based on the interest rates
in the economy. In money market or savings if the interest rates go down then you will obviously receive less of a
return. In bonds, if interest rates go up you will actually be likely to lose money. That’s because when interest
rates go up, investors can buy other bonds with higher yields, thus causing previously issued bonds (with lower
yields) to be sold at a discount.
So there you have the different types of investment risks (or at least some of them). Chances are you may have been surprised by a couple
of them.
