Financial lingo can be a little convoluted, intricate and downright torturous. Often times we think we know what something means, when in reality we have no idea. We here at Investment Account Manager want to clear the air for you and make your experience with our software an easy and enjoyable one.
Below is a list of investment risk terms that we have defined for you. If you have any questions, concerns or words you’d like defined, feel free to post your inquiries on our Facebook page.
Definitions of different types of investment risk:
Inflation Risk – Also known as purchasing power risk – the risk that the dollars invested will lose value due to inflation.
Interest Rate Risk – When interest rate rise, the value of fixed income investments, such as bonds, declines. Likewise, when rates decline, the value of fixed income securities rise.
Systematic Risk – This is the risk associated with being part of the entire market system and therefore cannot be eliminated by diversification. It is also known as volatility. It includes those events that affect the entire market, not solely the individual security or portfolio. It can be mitigated by using proper asset allocations within investment portfolios.
Business (Unsystematic Risk) – This risk includes the risks that are associated with the individual business and or industry – the ability to generate profits. These risks cannot be explained by the general movements of the market. Therefore, these risks can be reduced via adequate diversification.
Liquidity Risk – The ability sell a security or converting a security into cash at a fair price quickly. This risk is related with thinly traded securities. It is lack of marketability risk.
Reinvestment Risk – This risk is the risk that the investor will reinvest investment returns at a lower rate.
Political Risk – Included are regulatory risk and changes in government which affect the business of the individual firm.
Exchange Risk – This risk is also known as currency risk i.e., risk that currency fluctuations will impact the value of the investment.
Image Courtesy: iStockphoto/Nikada