What is risk?
Risk is inherent in all investment activity and is the other side of the coin from reward. Generally speaking, the riskier the investment the greater the reward will be, provided it comes good. Risk can be managed, but first it must be accurately identified.
Where have you heard of risk?
As an investor, risk will be a constant issue for you and your financial adviser, who will continually assess what is called your 'risk appetite'. In the financial media, new sources of risk will be discussed, whether market risk or economic and political risk.
What you need to know about risk...
Risk can be divided into many different types. One example is liquidity risk, where you run the risk of owning illiquid assets, like property, which you can’t convert to cash quickly. Another is interest rate risk, which refers to the fact that interest rate changes can affect the amount of money you earn from investments like bonds.
If you buy bonds from a company, there is a risk that they won’t be able to afford interest payments or to repay your initial investment. This is known as credit (default) risk.
Mitigating risk involves, first, correctly identifying where the risk lies in your portfolio and then taking steps to hedge your position, perhaps through derivatives or contracts for difference (CFDs).