Understanding Investment Risks

Before discussing the risks in
detail, it is necessary for investors to know as to how to handle, perceive and
define the risk in various ways. The best way to handle risk is by avoiding it.
This occurs when an investor chooses to avoid the activity associated with the
risk. Typical instance is the risk of injury while driving on an automobile. A
person can altogether avoid such risks by choosing not to drive.

 

In the world of investment,
avoidance of some risk is possible through the act of investing in the risk free
investments. Usually, short term maturity U.S. government bonds equate with
risk free rates of returns. Investors can completely avoid risks associated
with stock markets by deferring from investing in equity securities.

 

Risk Transfer:

 

Risk transfer is the other method
of handling the risk. The concept of insurance is an easy to understand
instance of risk transfer. In case, an individual has the risk of becoming
severely ill, then the most advisable option is to go for health insurance. Health
insurance is advisable for people having the risk of becoming severely ill. An
insurance firm allows the transfer of risk of large medical bills to the
individuals, in lieu of a fee known as an insurance premium.

 

The firm knows that
statistically, if they have a large enough pool of insured people, they can easily
pay the cost of the minority requiring extensive medical treatment and can have
enough amounts for recording profits.

 

Apart from insurance, risk
transfer also happens in investing. For instance, an individual can purchase an
insured municipal bond or purchase a put option on their stock. This would permit
that person to sell or put their stocks to someone at a set price, irrespective
of how lower the prices drop. There are plenty of such instances of risk
transfer in the field of investing.

 

Influence of Time on the Risk:

 

In terms of risk, investors need
to have a thought on the time in their investment plans. The objectives pursued
can require a policy statement pertaining to certain planning horizons.

 

For individual investors, it is for
a year or two in the anticipation of down payment on the home purchase, or the
lifetime planning for retirement. Generally, the longer the time horizon, the
more is the incorporation of risk in the financial planning.

 

While analyzing the risk of
ownership of fixed income securities such as bonds, time has a different
effect. As compared to a short term, there is more risk associated with the
long term holding of a bond.

 

By considering all these factors,
short term investment is the best option for investors looking for quick and
smart gains.


John Elton
owns and operates a Best Penny Stocks Picks website to help
other investors with their stock decisions. He also operates a Home
Based Business earn money online
site to help entrepreneurs gain experience
and wealth.

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