Coloradoru - Finance Blog

Risk exists in every action of our lives. It is basically the deviation of the actual happening from the expected result. The deviation may possibly be a positive or a negative outcome; however the term 'risk' is predominantly used in negative context. In financial world, risk is said to be existing when odds of actual return falling short of expected one are high.

All of us undertake massive financial investments in anticipation of returns and appreciation; however it is imperative to have knowledge of various risks involved which may limit the returns and appreciation of the investment. Though high risk investments tend to yield comparatively high returns one must bear the uncertainties.
A quantity of the risks that could arise are:

• Credit Risk - One of the most often noticed forms of risk; it indicates the probability of loss an investor might must incur if the borrower fails to make the necessary payments - default. In such case, the investor could finish up losing interest as well as the principal amount.

• Capital Risk - It refers to the feasible loss an investor could face if his preliminary investment is lost.

• Liquidity Risk - Sure investments involve trading of the asset at the right time to make profits. However, the inability of the holder of the asset in finding a buyer is known as liquidity risk.

• Market Risk - Due to variations in main market factors viz., stock prices, foreign exchange rates, rates of interest and commodity prices, if the worth of your portfolio diminishes your investment is exposed to market risk.

• Interest Rate Risk - An interest bearing device like bonds are usually subject to rate of interest risk, which suggests variation in the worth of the device with changes in the rates of interest. For ex: a fixed rate bond value tends to diminish with rising rates of interest.

In order to manage and mitigate risks, one must identify, evaluate and prioritize risks and the probable loss. There's plenty of risk management standards developed by institutions aiming at measuring and monitoring various risks.