Specific Risk

Specific risk involves any occurrences that may affect only a particular company. For example, the death of the founder, political developments, or heavy debt can affect a particular firm adversely. Some huge companies that have been around for a very long time, even with great products and unsoiled reputations, have fallen into the wrong hands and ended up worthless due to fraud and misrepresentation.

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Company Risk

 If a company’s stock value decreases due to financial difficulties, this creates an instant company risk. Internal factors such as inefficient production and poor management or external factors such as problems with the industry, the economy, or trade can contribute to company risk.

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Market Risk

Market risk is the risk associated with market fluctuations that can depress the value of particular investments. All stocks and bonds can be affected by downturns caused by fraud, war, or calamity. Additionally, certain types of investments can experience a major downturn should there be a slowdown in a specific industry or category of investments. Factors such as political developments, market cycles, changing investor sentiments or reaction to previous excessive rises or declines can all contribute to market volatility. Higher interest rates hurt stocks because they can slow the economy, which can crimp a company’s revenue. They boost corporate borrowing costs and make stocks less attractive relative to interest-paying investments.

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Interest Rate Risk

Interest rate risk occurs when changes in interest rates cause the value of certain investments to decrease. For example, when interest rates rise, the market value of fixed-income securities, such as bonds, declines. Bond investors hate inflation because it erodes the value of bonds’ fixed interest payments. Investors are locked into the lower rate as the market rates rise. However, this type of risk may hold less potential for major financial damage.

Economic Risk

Economic risk can surface due to the fact that slow economic growth will be too weak to sustain or improve the return on a particular investment. For example, the price of shares in growth companies that require a strong economy to sustain earnings may fall during an economic slowdown. Again, as in the case of liquidity risk, you would not want to invest any dollars required for education or other short-term needs into an investment that would have a substantial economic risk attached to it.

Inflation Risk

Inflation risk is the danger that inflation will reduce the purchasing power of your investment over time. Low-yielding investments such as savings accounts and money market funds may not earn enough to outpace rising prices.

Liquidity Risk

Liquidity risk means not being able to liquidate an investment quickly while keeping the original investment amount intact. This can occur with investing in bonds where the bond must be held to maturity in order for you to achieve a specific interest return. It can also be a risk should you invest in a particular stock, but find that the price is down at the same time you need to get your hands on the cash invested in that specific equity. For this reason, any dollars you need to access for the purpose of educational spending or maybe the purchase of a house should never be invested in the equities market.

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Unraveling the Mystery of Investing #1

Investing can be very complicated or very simple. It can be very successful or disastrous. There is risk with investing and there is risk in not investing. Investing can be very enjoyable or very distasteful. So in this chapter we want to give you some overall and well-rounded investment information. Absolutely no attempt will be made to influence you to invest in a specific type of financial instrument.

We must recognize the risks involved in all investments and what you can do to minimize those risks. Next, we will look at common mistakes that lead to investment disaster, followed by several principles you need to know about investing in mutual funds. We will then present some alternatives for your investment consideration, with a discussion of their various advantages and disadvantages. The purpose of this chapter is simply to give you enough information so that you can make your own wise financial investment decisions.

There are several types of risk that every portfolio can be exposed to. Investment gains and losses can result from such factors as economic conditions and changes in the financial markets. In building your portfolio, you should be aware of some of the categories of risk.  More in my next blog.

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“Whenever you get a blessing from God, give it back to Him as a love gift… If you hoard a thing for yourself, it will turn into spiritual dry rot, as the manna did when it was hoarded. God will never let you hold a spiritual thing for yourself; it has to be given back to Him that He may make it a blessing to others.”

Oswald Chambers, Scottish author, devotional writer
My Utmost for His Highest

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“Preparation for old age should begin not later than one’s teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement.”

Dwight L. Moody (1837-1899)

Founder of the Northfield Schools, Moody Church, and Moody Bible Institute

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