Typically, investing in stocks can generate higher returns than bonds and real estate. However, stocks come with some investment risk. A successful investor should educate themselves about the different types of investment risk.
Equity investment risk:
One of the biggest risks for stock market investors is economic risk. A bad economy can seriously affect stock prices and backfire on your investment.
Investing in stocks is subject to business risks. Your investment can literally drop to zero if the chosen company goes bankrupt or goes bankrupt, but you can reduce this type of risk through diversification. If you are properly diversified and invested in a wide variety of stocks, the associated risks can be controlled or reduced.
If you are investing in new or small companies, you might be at risk with growth stocks. Growth stocks are very sensitive to fluctuations in interest rates. Any bad news about the company can drive the share price down significantly.
Managing currency (or currency) risk is essential to a successful investment in the forex market.
Currency exposure or risk can be classified into three types: transaction, conversion and economic exposure.
Transaction exposure refers to the extent to which the company's future cash transactions can be affected by any change in the exchange rate.
Conversion exposure refers to accounting exposure. It measures the impact of changes in exchange rates on the financial statements of the group of companies.
Economic exposure measures the impact of changes in the exchange rate on the cash flow and profit of the business.
Most companies attempt to minimize the risk of exchange rate fluctuations by using hedging instruments such as forward currency contracts, money market hedging, futures, options, and swaps.