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Assessing an investment’s risk

Assessing an investment’s risk

All investments contain some degree of risk. They might not provide the expected or desired return, whether they be savings bonds, term deposits, mutual funds or stocks. The risk associated with an investment comes from 3 sources:

  • the product
  • the market
  • the investor

Risk associated with the product

Some investment products are more secure than others. Term savings, for example, have a very low risk of not giving the expected return. As a general rule, they are guaranteed by the issuer.

Purchasing stocks from a single company, however, can either make you a millionaire or cause serious financial problems if the company goes bankrupt.

Risk associated with the market

When the stock market goes down, it means that most of the stocks listed on the market have lost value. Interest rates can also suddenly drop—something no one can escape. Financial markets are affected by a multitude of economic variables such as inflation, the trade balance, domestic production and the available labor force. A single one of these variables can cause sudden fluctuations in the stock market, especially if the results announced differ from the predictions influential analysts and investors. If the market shifts, interest rates will probably also react.

Risk associated with the investor

Risk can also be determined by the investor’s behavior. For example, an investor may decide to sell off a stock or a mutual fund at the wrong moment, e.g., when the value of the stock or fund is low. The return will probably be lower than the historical average, and there is even a risk of losing part of the investment.

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