In general, investing in stocks can generate higher returns than bonds and real estate. However, stocks carry certain investment risks. A successful investor must learn about the different types of investment risk.
Stock investment risk:
One of the biggest risks for investors in the stock market is economic risk. The bad economy can seriously affect stock market prices and work against your investment.
Investing in stocks is subject to commercial risks. Your investment can literally go to zero if the company you chose goes out of business or files for 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 associated risks may be controlled or reduced.
If you are investing in start-ups or small companies, you may experience stock growth risk. Growth stocks are very sensitive to fluctuations in interest rates. Any bad news about the company can drastically lower the share price.
Currency risk:
Foreign exchange risk management (gold forex) is essential for a successful investment in the foreign exchange market.
The exposure or exchange risk can be classified into three types: transaction, conversion and economic exposure.
Transaction exposure refers to the extent to which the company’s future cash transactions may be affected by any change in the currency exchange rate.
The translation exposure refers to the accounting exposure. Measures the impact of changes in the exchange rate on the financial statements of the group of companies.
Economic exposure measures the impact of exchange rate changes on a company’s cash flows and earnings.
Most companies try to minimize the risk of currency fluctuations by using hedging instruments such as forward currency contracts, money market hedging, futures, options, and swaps.