Investing entails some risk. When it comes to government bonds, the risks are modest, but when it comes to stocks, options, and commodities, the dangers might be significant. Good investors understand that risk management is more essential than profit and that proper risk management is what leads to lucrative investing.
In this article, we will share 5 investing risk factors such as geopolitical risks to the financial markets, political risk, inflation risk, and more.
- Geopolitical risks to the financial markets
The term “geopolitical risk” refers to the dangers of political upheaval, military war, inter-country diplomatic disputes, and terrorist activities. Investors have been exposed to numerous big geopolitical events in the recent ten years, including Brexit, the US-China trade conflict, and the Covid-19 pandemic. Investors remain wary of the impact of geopolitical fallout on their assets as the frequency of such events rises. To avoid such risks you need to keep yourself updated with current geopolitical risks and have a diversified portfolio of investments.
- Political Risk
Commodity investors, such as those who invest in oil, are well aware of political risk. Investors were concerned that if Iran threatened to close the Strait of Hormuz, the price of oil would become more erratic, putting their money at risk. The turmoil in Haiti, as well as terrorist attacks on oil pipelines, has injected artificial volatility into the oil and commodity markets. Furthermore, difficulties relating to land claims in Southeast Asia, as well as tensions between North and South Korea, have shaken the region’s markets.
Because most events occur without warning, the socio-political risk is difficult to prevent, but having strong and fast exit points as well as hedges is the best approach to ride socio-political storms.
- Business Risk
The other investment risk is business risk. It’s the possibility that anything will go wrong with the company, causing the investment to depreciate. A disappointing earnings report, a change in leadership, outmoded products, or malfeasance within the organization are all possible dangers. Investors understand that projecting the risks associated with owning shares in a firm is practically impossible due to the enormous number of conceivable risks.
The best approaches to protect against business risk are to purchase a put option to protect against a major decline or to arrange automated stops.
- Commodity Risk
Certain commodities, such as oil or food grain, are essential for any economy and, because they are used as indirect inputs, they enhance the manufacturing process of numerous goods. Any fluctuation in commodity prices has a cascading effect on the performance of the entire market, frequently resulting in a supply-side crisis. Stock prices and performance-based dividends fall as a result of such shocks, and a company’s capacity to uphold the principle value falls as well.
- Currency Risk
Currency risk is also called exchange risk. It refers to the likelihood of a decrease in an investor’s return value due to the depreciation of the native currency’s value. When making an international investment, the risk is frequently taken into account.
Many emerging market economies keep large foreign exchange reserves to ensure that any probable devaluation may be offset by selling the reserves, reducing the risk of losing out on foreign investment.