Investment Risk and some warnings

 Investment Risk
Its known that there is no such thing as a
risk free investment. But understanding what
causes the risk can help you create an investment strategy to help protect against losses in
your portfolio.
Some of the risks you may face as an investor are the result of political uncertainty or a
downturn in the global economy. Sometimes a
downturn affects only the economy of a particular region or country. In other cases, risk
may be created by a slowdown within a particular industry. You should always be aware
that capital market products are higher in risk
than other investment products.
Loss of Capital
When you invest in an individual company,
you can make or lose money depending on its
performance. If the company’s performance
was good and made profits, your investment
will usually gain value, and you might be paid
dividends. On the other hand, if the company
does not perform well, your investment could
lose value.
Prices Fluctuation
One of the investment risks is prices fluctuation or the possibility that the stock price
may change in a short term. The greater the
prices fluctuate, the risk increases.
Risks and Return
Risk and return are directly related, which
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means that the greater the potential that an
investment might lose money, the greater its
potential revenue. One of the keys to successful investing is finding a way to balance risk
and return in your investment portfolio.
Diversification: a Strategy to Reduce Risk
Since different investments have different levels of risk, the best way to protect yourself
is to vary your investments across different
asset classes, such as stocks, Sukuk, and real
estate. Also, you would want to diversify your
investments among different companies from
each type. The goal is to lower the risk and to
protect your portfolio if there was a market
downturn.
Knowing your Risk Tolerance
Some investors are willing to take on risk
more than others. Your risk tolerance is generally influenced by factors such as your age,
your financial situation, or even your personality.
For example, some investors have a greater
tolerance for risk and are able to deal with
losses of their investments. They may be willing to invest in companies where there is
higher risk, but also a greater opportunity for
return. More conservative investors, however,
are more comfortable with investments that
do not pose a greater risk but do not have the
same potential for higher returns.
Risk tolerance may also change as your financial goals change, or as future goals approach. For example, you may want to shift to
less risky investments as you come within a
few years of meeting certain goals. That way, if
there is a sudden downturn in the market just
when you need the money, you will not find
yourself with less than what you planned for.