Investing and the risks?
11th December 2018
Investing, a way to make money by being smart rather than working hard. Investing is a brilliant way to make money, with the chance to return a substantial amount upon that invested. People assume that investing is only for businesses or those classed as professionals, it is in fact available for anyone and everyone!
To invest is to buy or deposit money into (such as a company) in order to gain a profitable return. For example, buying bonds/securities would mean you are essentially loaning your money to a company or organisation, to then retrieve it back at a later date along with a profit.
But what are bonds/securities?
To buy a bond/security is one of the four major ways in which to invest. The four most popular ways of investing are;
- To buy bonds/securities – this would mimic loaning money to a company to obtain a profit at a later date.
- To deposit cash – this would normally be done by depositing cash into a bank or building society where one would rely on that company’s interest rate to obtain a profit.
- Property investment – this could be viewed as using money to buy or build a house, to then sell at a profit.
- Purchasing shares – This would be when you purchase a share of a company, essentially purchasing a part of that company to then sell back to them at a later date.
So, you invest your own money, where you could either make a profit or loss? It sounds a lot like gambling to me!
As a matter of fact, this would not be classed as gambling. Gambling is seen to be a “get rich quick scheme”, whereas the process of investment is a lengthy process and can sometimes take years. A lot of people tend to invest alongside their day job as they see this to be more practical and beneficial to their lifestyle.
However, there is still the element of risk in which looms over investing, whether you are a fully trained professional, or a side investor whilst working your day job and see it more as a hobby. Some ways of investing are riskier than others. Usually, the more risky ways of investing prove to be a more effective way to produce a profit, providing the investor the opportunity to obtain a higher return rate. However, a higher risk factor, could ultimately produce a loss bigger than the potential profit.
Three main types of risk
Interest Rate Risk
This refers to the risk of decrease in the value of a bond, which is a result of an unexpected change in related interest rates.
This risk refers to that of where the bond issuer could potentially be unable to issue the interest rate payments. This could also be related to a particular bank or building society, where they are going through some hardship which means they are unable to pay the interest rate value related to a savings account.
The risk of not being able to sell an investment as and when the investor wants to. For example, in relation to property investment, the investor risks not being able to sell the property as and when they want to.
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Hillier, D., Westerfield, R., Jaffe, J., Jordan, B. & Ross, S. (2016) Corporate Finance, Maidenhead: McGraw-Hill Education
Lumby, S. & Jones, C. (2015) Corporate Finance, Andover, Hampshire: Cengage Learning
Van Horne, J. & Wachowicz, J. (2005) Fundamentals of Financial Management, Harlow: Prentice Hall Financial Times
Ontario Securities Commission (2018) Types of Investment Risk – Understanding Risk, Available from: <https://www.getsmarteraboutmoney.ca/invest/investing-basics/understanding-risk/types-of-investment-risk/> [Accessed: 8 December 2018]