Types of Investment Risk

In general terms investors who are in favour of risking their investments in pursuit of gaining more returns use equity type of securities. When there is a bull market, it is very hard for any other security to beat its profits. However there are also investors which prefer playing safe and therefore invest in fixed interest securities, broadly speaking bonds. Although it depends on how reliable is the issuer of bonds, investors gain lower but safer stream of income through them. Followings are main types of investment risks that an investor has to face.

Company Risk: (also known as unsystematic risk) company-specific events, such as a poor company reports at the end of the fiscal year, management change, legal action or the possibility of bankruptcy has an influence on stock prices.  Company risk is a concern for equity and corporate/high yield bond fund investors.

Country Risk:  This can be political, economic and other financial events which might have an influence over the value of foreign securities. Country risk is a potential concern for international bond and equity fund investors. 

Credit Risk:  The risk that the issuer of a security, such as a bond, may default on interest and/or principal payments or become bankrupt. Government bonds are usually regarded as higher quality bonds and face the lowest credit risk. By contrast, bonds that are issued by companies with poor credit ratings are subject to higher credit risk. Credit risk is a potential concern for bond fund investors. 

Currency Risk: The risk involved in transactions where more than one currency is involved. A movement in international exchange rates may change the cost of buying an asset before the purchase is completed. Currency risk is a potential concern for international equity bond fund investors.

Inflation Risk:  Inflation decreases the purchasing power of money so that it eliminates returns from an investment. Inflation risk is a potential concern for money market fund investors.

Interest Rate Risk: The risk that the value of a fixed income security will fluctuate as interest rates change. The value of a bond tends to move in the opposite direction of interest rates.  For instance, when interest rates rise the value of a bond will usually fall because it's stated coupon rate is lower than the going market rate.  Interest rate risk is a more immediate concern for bond fund investors.

Liquidity Risk: The risk that arises when a security cannot be sold easily.  Liquidity risk comes into play if an investment has to be sold quickly, but an insufficient secondary market prevents the liquidation of shares, or limits the price at which the security can be sold.  Liquidity risk is a potential concern for both bond and equity investors. 

Market Risk: (also known as systematic risk) The risk that applies to an entire asset class, with economic changes (e.g. recession) and other large events. An overall decline in the stock market may have a negative impact on the securities. Although the companies may be doing well, if there is a general decline in stock prices stock prices may decline in value anyway.