The risks associated with investments
Investments involves risks
While investments can be profitable, they are also associated with risks. You could lose all or part of your initial investment. This page explains the risks associated with investments and how you can take them into account when making your investment decisions.
The main risks associated with investments
If you are aware of the risks associated with investments, you will be in a better position to decide which risks you are willing and able to run. Most investors have heard of price risk, market risk, concentration risk and credit risk, but there are some other risks that you need to be aware of too.
Price risk
Price risk is related to the price of an investment product and means that the value of your investment could drop. This risk is different for the various types of investment and depends on factors such as:
• the yield of the investment;
• supply and demand for the investment;
• changing investor moods (see also: market risk).
Market risk
Market risk is the risk of sharp increases or decreases on the market as a result of changing investor moods. This is also known as the ‘volatility’ of the market. The market is generally highly susceptible to mood changes. A positive mood can make investment prices rise, while a negative mood could cause them to drop.
Concentration risk
If you have just one or only a few different types of investment, you have what is known as a concentrated portfolio. If these investments don’t perform so well, you’ll have few to no other well-performing investments to compensate the losses.
Default or credit risk (for bonds)
Most bonds are issued by companies or governments. The issuing party is the debtor of a bond, and the likelihood of the debtor being able to pay interest and repay the bond amount at the end of the term is crucial. This is known as the debtor’s creditworthiness, which is expressed as a credit rating. The higher the credit rating, the lower the interest you will receive on the bond. Conversely, the lower the credit rating, the higher the interest will be. If a debtor’s credit rating drops, the bond price will usually drop too. Increases in the credit rating usually cause prices to rise.
Other risks associated with investments
Currency risk
If you have an investment product in a currency other than the euro, this other currency can present a risk, as its value may drop compared with the euro. This will also have an impact on the value of your investments in euros.
Interest risk
Interest is the price paid for borrowing money. Changes in the market interest rate can have an impact on things like share prices or fixed-rate bond prices. Interest risk is therefore also a price risk. In general:
• If interest rates rise, share prices or fixed-rate bond prices will drop.
• If interest rates drop, share prices or fixed-rate bond prices will rise.
Liquidity risk
Liquidity risk is the risk that it will be difficult for you to sell your investment, because there is little or no demand for it.
Political risk
Government measures or statements made by politicians can also have a negative impact on the value of your investments. This is known as political risk.
Inflation risk
Inflation is a decrease in the amount that you can buy for one euro. This means that the value of the euro has decreased, and the value of any investments you have in euros will therefore also have decreased.
Reinvestment risk
Reinvestment risk mainly applies to bonds. When you get the bond amount back at the end of the term, there is a risk that you will be unable to reinvest it in a bond with similar features, such as more or less the same credit rating, term and interest rate.
Risk of unforeseen situations
Unforeseen situations include terror attacks and drastic changes to legislation. They can have a major impact on the price of your investments, even if your investments are very defensive (with little risk).