Risk Management
Risk management and investing
Many people understand risk management intuitively, as minimising risk is an integral part of survival. Whether you are looking both ways to assess the risk of incoming traffic, sharing your live location on a trip or buying a screen guard for your phone. What you are doing is identifying, assessing, and taking steps to mitigate potential risks associated with everyday decisions. In investing, risk management takes on a very similar form as Investors navigate financial markets by identifying potential threats, evaluating their impact, and implementing strategies to mitigate risks. In this write-up, we discuss the concept of risk management in investing and tools for managing investment risk.
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Common Questions Answered
Market risk, refers to the risk of loss due to factors that affect the overall performance of the financial markets. This includes factors such as economic downturns, political instability, and market volatility. You can protect yourself from market risk to some degree by having investments across different markets.
Credit risk is the risk that a borrower will fail to repay a loan or debt obligation. This risk is particularly relevant for fixed-income investments such as bonds or loans. Factors that contribute to credit risk include the financial health of the borrower, changes in credit ratings, and economic conditions.
This refers to the risk that the purchasing power of your investments will decrease over time. Investments with fixed returns, such as bonds or savings account with low interest rates, are particularly vulnerable to inflation risk.
This refers to the risk that an investment cannot be quickly sold or converted into cash without a significant loss. Investments in illiquid assets, such as real estate or private equity, may be more susceptible to liquidity risk, especially during periods of market stress.
This arises from fluctuations in the value of foreign currencies relative to your home currency. This risk affects your purchasing power for foreign and imported goods. In Nigeria, where most goods are imported, it is one of the largest contributors to the inflation currently being witnessed. It can also impact Investments denominated in foreign currencies when converting profits back into your home currency.