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Understanding the different risks when you invest

POSTED ON September 09, 2019

Risk is impossible to avoid when investing. As a general rule, the higher the earning potential, the higher the risk that you’ll encounter.

All investments are exposed to price risk or market risk, which means the value of an investment changes because of the market. This is affected by a lot of things but it all boils down to how valuable the investment itself is and how much people are willing to pay for it.

The price people are willing to pay for an investment is also affected by other kinds of risk. Here are some examples:

Liquidity risk – When an investment can’t be exchanged for cash quickly, you risk loss if its value drops and you can’t sell it.

Default risk / Credit risk – You may experience this when you invest in something that involves fixed income, like time deposits, treasury notes, treasury bills, and bonds. A default happens when the institution that issued the investment can’t pay you the money you’re owed.

Interest Rate risk – This is specific to fixed-income investments. The value of these investments is affected if the Bangko Sentral ng Pilipinas adjusts the key interest rate.

Fixed-income investments are locked into their interest rates. If the key interest rate rises, the value of existing investments will drop.

Foreign Exchange risk – If your investment deals with foreign currencies, then its value is strongly affected by foreign exchange rates.