Top Reasons for Avoiding An Investment
While there may multiple advantages which might attract investors to invest in a choice, these are the top reasons which make investors panic and decline the investment:
- Market risk: This type of risk occurs because of certain happenings which affect the entire market. For example bankruptcy news of a leading corporate house.
The types of market risk are as follows:
Equity risk: It is the risk of a decrease in the market price of shares.
Interest rate risk: This is the risk of monetary loss because of the change in the rate of interest.
Currency risk: Occurs due to fluctuation in forex rates. Basically, foreign investments are affected by currency risk
- Liquidity risk:
Certain investments are not easily resaleable. Hence converting the money invested again into cash becomes tough. This is known as liquidity risk. In the case of cryptocurrency trading, the amount invested can be withdrawn at any time. There is no fear of liquidity. Apps like bitcoin trader facilitate even persons without experience and knowledge to trade in cryptocurrency easily. Read this to learn more about it.
- Concentration risk:
The risk arising out of accumulating all the funds in the same type of investment is known as concentration risk. For example, a person investing all his funds in the shares of an oil company would taste loss when oil prices fall globally. This will immediately result in a fall in the price of shares of the oil companies. If the entire funds are invested in an oil company, then chances are there that the entire investments will be wiped.
- Credit risk:
This risk applies to bonds. When the government runs into trouble due to instability the bonds may not be repaid on maturity.
- Reinvestment risk:
The risk of reinvesting the capital in comparatively low return investment options is known as reinvestment risk.
- Inflation risk:
‘Too much of money chasing too few goods’ is the definition for Inflation. Due to increasing inflation purchasing power comes down. Over a period of time, the same amount of money which was used to buy a certain number of shares may not be sufficient to buy the same number of shares.
- Horizon risk:
Due to unexpected events like job loss, disability etc. if income earning capacity is shortened, the investor is said to have a small investment horizon.
- Longevity risk:
Living too long may result in outliving savings. This risk is high in the case of aged persons.