what are the types of risks involved in an investment?

What are the types of risk involved in an investment?

Meaning of Risk:- It is the chance of loss and the possibility of uncertain situations. Thus the risk is losing something or suffering loss from something due to the uncertainties.

According to Fisher:- “Risk may be defined as combinations of hazards measured by probability.”

Types of Risks

Risk can be classified into two types of investment.

Systematic Risk
Unsystematic Risk
Individual and Groups Risks
Dynamic and Static Risks.
Financial and Non Financial
Quantifiable and Unquantifiable
Pure and Speculative

( 1 ) Systematic Risk:- It is an unavoidable risk. So it cannot be eliminated by the diversification in the portfolio. Because every share, bond is influenced by the general market trends. Such risk fluctuates due to the economic, social and political changes. As all prices of individual securities move due to the economic trends which affect the whole market. Which directly affects the return of securities due to the changes of prices of securities.What are the types of risks involved in an investment?

Systematic Risk arises due to the following factors what are the types of risks involved in an investment?

Market Risk
Interest Rate Risk
Risk of Purchasing Power

Market Risk:- When prices of securities are changed due to the social, political and economic events it is referred to as Market Risk. However, such market risk is arised due to the changes in demand and supply under pressure following the flow of expectations. It also includes factors like psychology and sentiments of investors which cause some fluctuations and uncontrollable risk.
Interest Rate Risk:- Generally prices of securities move inversely to the changes in the rate of risk. With changes in interest rate, the perception of investors is influenced. Because monetary policy and credit policy which is not controllable by the investors. Due to which expectations create the risk about return of their investment.
Purchasing Power Risk:- Uncertainty of purchasing power has occurred due to inflation. This process leads to increased wages and cost of production. Due to which cost of material and labour will also be increased. As a result , the margin of profit will be lesser. Due to which return will be declined for the investors. No sufficient dividend will be left for investors. So purchasing power refers to the uncertainty in the value of money received in the future due to inflation. So purchasing power is also uncontrollable in the hands of investors. what are the types of risks involved in an investment?

( 2 ). Unsystematic Risk:- Unsystematic risk is that risk which is concerned with the firm or industry. Such risk may be related to the specific risk and can be controlled if proper measures are taken. It can be caused by factors like management policy, Shortage of power, recession in a specific industry, consumer tastes and preference and labour etc. Thus, such a type of risk can be controllable or avoidable.

Such type of risk can be further divided into following types:

Business Risk
Financial Risk
Credit or Default Risk
Other Risk

Business Risk:- Business risk can be two types of risk as internal or External. Internal risk can be aroused due to non availability of raw material, deficiency of the part of management to face competition, absence of strategic management and improper product mix. Internal risk is concerned with the efficiency with which an organisation conducts operations of business. External Risk is that which is beyond the control of a firm. As the changes in business law, international market conditions are concerned with business.
Financial Risk:- Financial risk depends upon the capital structure of a firm. As capital structure may be mixed with debit and equity. A proper financial structure and planning can be done to correct this risk as it is controllable.
Credit or Default Risk:- The creditworthiness plays an important role in the finance of an organisation. If the borrower becomes insolvent then he will be unable to pay the company. So financial problems will arise for the company. So before giving loans to such investors. Creditworthiness must be checked by the company for the purpose of reducing credit risk. Thus, defaulters will pose problems before the development of the company. Thus, it\’s controllable and avoidable for the firms. what are the types of risks involved in an investment?
Other Risks:- Beside the above discussed risks there are some other risks. These types of risks are associated with the foreign securities. Because investors are interested in buying foreign securities to gain the highest return as compared to domestic securities. However, there are some risks such as monetary value risk, political environment risk and risk associated with the foreign government risks. So investors have to make decisions carefully when investing in foreign securities. what are the types of risks involved in an investment?

( 3 ). Individual and Group Risks:- If risk is spread over the macro level, it is known as group risks. Such risks are arised due to unemployment, war, floods and earthquakes etc.

Individual risks are those risks which occur to the individual in the group of society. Such risks arising due to the fire, theft, robbery etc are known as individual risks. However, these types of risks may be insurable.

(4). Financial and Non Financial Risks:- When losses are incurred to an individual person. Then his property or assets are destroyed in such loss is called financial risks. Beside it when loss incurred except the financial is called non financial Risks. what are the types of risks involved in an investment?

(5). Dynamic and Static Risks:- Risks are incurred due to changes in the economy and environment, it is known as dynamic risks. These risks are arised due to the changes in fashion, taste, income and technological changes. Static Risks are those risks which are less or more predictable. These are not the outcome of changes in the economic environment.

(6). Quantifiable and Unquantifiable risks:- Risks which can be measured in terms of finance are known as quantifiable risks. Whereas unquantifiable risks are those which can\’t be measured in terms of finance, are known as Unquantifiable risks. what are the types of risks involved in an investment?

(7). Pure and Speculative Risks:- Pure risks include the risks which may or may not occur. Such risks can be insured. If loss will occur then insurance will compensate the policy holder. Example- A car insured, if there is no accident then there will be no compensation. However, if there is an accident then the insurance company will pay compensation to damage costs. So there is no profit under such risks. What are the types of risks involved in an investment?

Speculative Risks– Where there is possibility of profit or loss, it is known as speculative risks. These risks are undertaken with the intention of earning profit. But the possibility of loss remains. Thus, the possibility of avoiding loss under the pure risks. Whereas speculative risks have the possibility of gain also. What are the types of risks involved in an investment?

Conclusion:- From the above discussion we can find the types of risks. As there are mainly two types of risks as Systematic it is unavoidable risks. and Whereas Unsystematic Risks can be controllable and avoidable. However, beside these risks some other types of risks are available. Whose scope also covers the systematic and unsympathetic risks. Now this question gives the answer: what are the types of risks involved in an investment?

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