Investors need to be aware of the various types of risks that they face while investing. These risks include inflation, market fluctuations, and the risk of losing money. If you invest in bonds, interest rate risk can be a major issue. If the interest rate increases, the value of bonds will fall. If you invest in foreign securities, currency risk can be a problem as well.

All investments come with risk, but some risks can be controlled. One of the keys to investing successfully is developing a risk-reward ration. In general, the higher the risk, the greater the potential reward. This lesson will introduce students to the five main types of investing risks and allow them to compare the risk and reward of some of the most common forms of investment.

Liquidity risk is another risk that investors should understand. Liquidity risk refers to how easily a given asset can be exchanged for cash. Cash is the simplest asset to sell and is therefore the most liquid. In contrast, stocks and bonds can take months or even years to sell. These types of assets can make it difficult to realize gains and cover cash needs.

Another common risk of investing is the risk that an investment may not be sold at a fair price. This risk can be reduced by diversifying your portfolio. For example, you could invest in a few stocks of different large companies. You could also invest in mutual funds, which offer complete diversification in one investment.

Another risk that affects stocks and bonds is interest rate risk. This risk reduces the purchasing power of money over time, making the same amount of money buy fewer goods and services. This risk is particularly relevant to debt and cash investments. Inflation-proofed investments, such as shares, offer protection against this risk. Most companies are able to raise their prices to customers, so the value of their shares should rise in line with inflation. In addition, real estate also offers protection against inflation, since landlords have the right to increase rents over time.

Volatility: Volatility is an important risk that can affect an investment’s performance over a long period of time. Volatility can be high or low, flat, negative, or positive. In some cases, high volatility can lead to superior returns, depending on the investment strategy. If you are not comfortable with this risk, it’s best to steer clear of investments.

Another common risk involves company performance. If a company isn’t performing well, its stock value can drop rapidly. If the company fails, your investment value will be wiped out. Managing company risk requires careful analysis. You need to analyze quarterly earnings results, listen to management commentary, and verify the stock valuation.