Understanding,Investment,Risks finance, share, loan Understanding Investment Risks
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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.
Understanding,Investment,Risks