Risks that affect your investments come in many forms. Actively managed mutual funds and investment accounts attempt to minimize these risks.
Business Risk refers to the possibility that
an issuer of a stock or a bond will experience a loss and/or go
bankrupt, or in the case of a bond, be unable to pay the interest or principal
repayment. Business risk can be influenced by many factors including
competition, government regulations, the economy and more. Mutual
funds hold securities of many different companies, which minimizes this risk.
Counterparty risk, also known as default risk, occurs when a party does
not live up to its contractual obligations. It is a risk to both parties
involved in a financial contract and should be taken into consideration when
Credit Risk, Default Risk
Credit Risk, Default Risk refers to the possibility the issuer of a bond will be unable to make timely principal and interest payments.
Currency Risk refers to the possibility changes in the price of one currency will affect another. If the value of the U.S. dollar is strong, the value of Non-U.S. securities may decline. If the dollar is weak, the value of a U.S. investor’s Non-U.S. assets may rise.
Interest Rate Risk
Interest Rate Risk refers to the possibility interest rates will rise and reduce the value of your investment. Fixed rate instruments decline in value when interest rates rise. Longer-term fixed-income securities such as bonds and preferred stocks have the greatest amount of interest rate risk, while shorter-term securities such as Treasury bills and money markets are affected less.
Market Risk or systematic risk, refers to risk that affects a certain industry, country or region, usually caused by some factor that impacts a whole segment of securities in the same manner. Diversification through mutual funds that invest in different markets can be an effective tool to manage this type of risk.
Inflation Risk refers to the possibility that the value of an asset or income will decline as inflation shrinks the value of a country's currency. Because inflation can cause the purchasing power of cash to decline, investors may want to consider investments that appreciate, such as growth stocks or bonds designed to stay ahead of inflation long-term.
Political Risk refers to the possibility that political unrest; government action, terrorism or other social changes can impact investments.