THOUGHT OF THE WEEK
INVESTMENT RISK (PART 1)
This is the probability or uncertainty of losses rather than expected returns from investment due to a fall in the fair prices of securities such as bonds, stocks etc. Every investment has an exposure to some level of investment risk.
TYPES OF INVESTMENT RISKS
1. MARKET RISK
This is the risk of an investment losing its value due to various economic conditions that affect the entire market. The various market risks include:
Equity risk- This risk applies to investment in shares. The market price of shares keep increasing and decreasing based on various factors. Equity risk is the drop in the market price of the shares.
Interest rate risk- this applies to debt securities. Interest rates negatively affect debt securities. The market value of debt securities increases if interest rates decrease and vice versa.
Currency risk- this also pertains to foreign exchange investments. It is the risk of losing money on foreign exchange investments because of movement in the exchange rates. For example: if the US dollar depreciates against the Ghana Cedi, the investments made in US dollars will be less valuable in Ghana cedis.
2. LIQUIDITY RISK
This is the risk of not being able to sell the securities at a fair price and converting it into cash. Because of less liquidity in the market, the investor might have to sell the securities at a lower price making them lose value.
3. CONCENTRATION RISK
This is the risk of loss on the invested amount because it was invested in only one security or one type of security. The investor loses almost their entire invested amount if the market value of the invested security goes down.
4. CREDIT RISK
This risk is the risk of default on the bond or debt security issued by a company of government. The issuer of the bond may face financial difficulties, which will not enable them to pay the interest or principal to the bondholders (investors). This makes them default on their obligations… (TO BE CONTINUED)
This weekly report is the copyright of NIMED Capital Ltd. (NIMED), an investment banking company licensed and regulated by the Securities and Exchange Commission (S.E.C.) of Ghana as Investment Advisers as well as the National Pensions Regulatory Authority (N.P.R.A.) as an approved Pension Fund Manager. Information and opinions herein have been compiled or arrived at based on information obtained from sources considered reliable; we therefore do not hold ourselves responsible for its completeness or accuracy. All statements of opinion, projections, forecasts, or those relating to expectations regarding future events or performance of investments represent NIMED’s own assessment and interpretation of information currently available to NIMED, which are subject to change.