If you are entitled to a regular payment (as with fixed interest securities), there is the risk that the issuer may not be able to keep up these payments or repay at redemption. This is known as default risk.
The issuer may not actually default, but the perception that they might - the credit rating - may change, and this could lower the market value of bonds. This risk is called credit risk.
If the investment is overseas in a foreign currency or a company does business overseas, its value in sterling will be affected by exchange rates. This is called currency risk.
Inflation reduces the future purchasing power of your investments, and the interest you earn may not compensate for this. Inflation risk can therefore affect both your investment objectives and other investment risks.
It may be difficult to cash in your investment quickly or at the price you expect. This is called liquidity risk. It is a risk often associated with investments in property, which is a highly illiquid asset.
How to avoid risk??
Risk can never be eliminated but it is possible to manage it successfully. The principal weapon is "diversification" - spreading your risk.
If you put all of your eggs in one basket, you are vulnerable to risk. Different investments behave in different ways and are subject to different risks. Saving your money in a range of assets helps reduce the loss, should one of your investments suffer a downturn.
There is also a need to diversify within each type of investment. This is especially important in the case of share and bond investing, but can even be true of cash, where the risks are generally lowest. Putting all your money in one deposit account runs the risk that the interest paid on that account will change relative to other accounts. This could mean that the interest you receive is no longer as good as when you originally invested.
It is important to remember that all investments have a degree of risk. Even choosing not to invest is risky. The key is to get the right balance. Most people need a mix of assets in order to achieve their goals. The mix required depends upon individual needs.
First of all, plan about ur investments..Decide on ur Goals and take your time frame..
1. What are u investing for? may be for education, marriage, new house,retirement & so on & so forth..
2.How long do u expect it will take u to make enough money to meet ur goal??
3.When u want to spend ur money r u investing??
You may have a lump sum to invest which you would like to see grow, or from which you wish to draw an income. Equally, you may decide to invest in instalments, (for example, on a monthly basis) with a view to building up a lump sum.
Your investment goals should determine your investment plan and the time question: - "How long have I got before I need to spend the money?" - is crucial.
Generally, the longer it is before you need your money, the greater the amount of risk you are able to take in the expectation of greater reward. You don't want to find yourself having to sell just when the price has fallen. If you plan to spend the money soon, say in a few years, if you are nearing retirement and are planning to take an immediate income from your pension fund, you will want to safeguard the value of your money.
So plan how to invest, where to invest, what r the available sources for investment, what r the multiple options available, which option is best suited???????So find the answers for all these questions based on ur capability, opinion,requirement and moreover for ur own benefit..Since no one can know about future, so its best when u invest ur money!! There may be bad times, wherein money is atmost requirement and since some of us dont wish to take financial help from others[eventhough they r extremely close to us] its best option to invest from initial stages of joining a job!!
Goal TimeFrame Plan
Retirement Income 40years to go Mainly Shares
Saving for Children 18years Mainly Shares
Retirement Income 5-10years to go Bonds, Cash & Shares
Next Year's Holiday 1Year Cash
Immediate Income Continuing Bonds & Shares.