'Money: It's Personal' — What is investment risk?
SAN ANTONIO – All investments have some degree of risk.
The U.S. Securities and Exchange Commission refers to risk as the degree of uncertainty and/or potential financial loss inherent in an investment decision.
Generally, investors will seek higher returns for taking an investment with a higher risk, but not all risk is the same.
The SEC points to several risks investors may face:
There's business risk, which comes with buying stocks or bonds. The SEC says returns from both of these types of investments require that a company stay in business.
If the business goes bankrupt, its assets are liquidated, and the company's bondholders are paid first and then its holders of preferred stock. Common stockholders are the last to share in whatever is left over, which can sometimes be nothing.
There's also volatility risk. This type of risk can make a company's stock price go up or down depending on several factors.
The SEC says stock price can be affected by factors inside the company or events the company has no control over, such as political or market events.
There's liquidity risk, which is when investors can't find a market for their securities. This can prevent them from buying or selling when they want.
And there's inflation risk, which reduces purchasing power. This is a risk for investors who are receiving a fixed interest rate for their investment.
The SEC says the main concern for those individuals is that inflation will erode returns on certain investments.
To learn about other risks involved with investing, click here to access the Securities and Exchange Commission website.
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