Investment risks and their types

Sooner or later each investor of funds in any assets faces such a concept as investment risks. They assume the possibility of a lack of profit or loss from the transaction due to a number of factors. The investor needs to remember the main rule, which states that profit and risk are directly dependent on each other. That is, the greater the planned level of income, the greater the likelihood of an unfavorable situation.

Investment risks need to be controlled, and for this it is necessary to know what their types exist, as well as to explore ways of influencing them. The businessman should choose the result, which he wants to receive as a result of the operation. There are two extreme positions:

1. The entrepreneur decides that the size of the profit is not so important as the low level of risk.
2. Despite the high riskiness of the project, he prefers to get a good income.

Of course, the ideal position for each depositor is a high degree of profitability of the project, not threatening a sharp loss of profits. Risk management of the investment project serves to achieve a compromise that satisfies the entrepreneur's requirements as much as possible. Experts propose to adjust the existing project, that is, either to do everything to minimize the risk for a given amount of profit, or to try to increase revenue with less risk. Most economists believe that it is possible to regulate risks in a qualitative way, while obtaining the maximum effect, it is possible only with the help of the strategically developed plan itself.

The following types of investment risks stand out.

Depending on the area of operation, there are:

• Economic.
• Social.
• Political

The first type of risk has the greatest impact on the investment sphere and assumes that there are unfavorable changes in the country's economy. Political investment risks include legislative restrictions on the market related to the reform of the state administration. And by social means the human factor, for example, strikes, the implementation of special programs that do not go for the benefit of the main activity of the entrepreneur.

If you classify investment risks by the criterion of the source of origin, then in this case there are two types:

• Systematic.
• Unsystematic.

The first is called non-diversifiable risk. His influence extends to all investors. This type of risk is formed under the influence of external factors that do not depend on the direct participants in the transaction. An example is the risk of currency exchange rate fluctuations or interest rate risk, since these indicators are set under the influence of many factors that the investor can not regulate. Many entrepreneurs often suffer from inflation risk, as the value of securities decreases with the growth of inflation, and when it falls, the reverse process occurs.

Non-systematic investment risk, the so-called specific, involves the assumption of an error by any participant in a particular transaction. For example, a loss in the fight against competitors or irrational investment of funds. This risk can and should be prevented in many ways, one of the most common is considered a differentiated portfolio of securities, that is, investing in various segments of the market. Then the decline in profits in one area will necessarily pay off due to an increase in another.

Specific risks include business and financial risk. The first arises from the illiteracy of the entrepreneur or the poor performance of his team. And the second one assumes that there is a risk in choosing a certain financial policy in case of its inefficient operation.