*Please note: The list of risks outlined in this article is not exhaustive and for informational purposes only. Specific risks depend on the chosen asset and type of financial instrument that a person wants to invest in. Other investment risks pertaining to exchange rates, lack of company liquidity, political factors like laws of protectionism, geographical concentration and others may apply.
As technological innovation is making investing more accessible to a larger audience, it is important for new investors to learn about the risks involved when investing money.
Your individual financial situation, i.e. your income, your savings, your expenses, where you live, along with current market conditions, cultural influences and your investment goals, are some of the factors that make up your personal risk profile, which will help you do define your relationship with risk and return (your risk tolerance and your loss tolerance).
Understanding risk versus reward
It’s a fact that investing in securities such as stocks, bonds, currencies, investment funds and others does not only provide opportunities for high rewards - investing your money also entails the risk of losing part of or, in the worst case, all of the capital you have invested.
This means that knowing about risks and their consequences should be part of your knowledge toolkit before you start investing. You should recall potential risks before any investment decision you take. Ask yourself: Which risks could adversely affect the performance of your investment?
One of them might be your own behavior as an investor. Even if you are using a financial services provider such as a broker or a bank, investing your money means that, first and foremost, you are responsible for your investment. This is why you need to do something called “due diligence” before investing in any financial product.
What are due diligence risks?
In a nutshell, due diligence means that you need to carefully analyse and examine the financial, economic, legal and tax situation of a company if you are considering buying their stocks. Exercising due diligence fundamentally applies to each financial product that you are considering as an investment. This also means that you obtain all necessary information and observe any deadlines regarding your investment.
What are investment cost risks?
Investing is not free. Financial institutions will charge fees for purchasing and managing your accounts, investment fund shares and various other services. Even if a financial product is performing well, it may take a long time until you make gains from an investment. Keep in mind that all costs need to be covered before you receive any earnings. So make sure that you research different offers to ensure you don’t pay too much in fees, based on your personal situation.
