Business Blog

A Primer on Risks and Diversification

, / 843 0

There are always risks in any kind of financial market for Online Forex Trading. After all, we keep saying it’s inherent and that you cannot entirely kill risks.

Now, what’s more important is the way you manage these risks and diversify your way further away from them.

Risk and diversification should come together. Proper diversification can help you minimize, mitigate, and ultimately avoid the risks in your investments.

What are Risks?

Risk is defined as the exposure to potential danger and the possibility of a loss or damage. Even in our day to day activities, we are always exposed to different kinds of risks that we cannot even start to imagine.

In the investing world, risks are the chances that your investment’s return will be different from what you have expected or targeted. Often, it’s all about the chances of losing all your invested money and possibly become indebted.

There are various kinds of risks that every investor should take time and consider. Some of them are listed below.

  • Credit or default risk – this is the risk that a borrower may not be able to pay back the interest or principal on its debt obligation. This should concern you if you’re holding bonds in your portfolio. Government bonds have the least amount of credit or default risks, while corporate bonds have the highest.
  • Country risk – this one refers to the risk that a particular country won’t be able to honor its financial commitments. Country risks apply to different financial instruments such as stocks, bonds, mutual funds, options, and futures.
  • Foreign Exchange Risks – if you are investing in foreign countries, keep in mind that currency exchange rates can also disrupt the price of an asset. This type of risk is applicable to all the financial instruments that are denominated in a currency except your local currency.
  • Political Risks – this involves the risk that your investment’s returns will get affected due to political events, changes, or instability in the country. You have to be aware of the current political landscape in the country in which your investments lie to get an idea how much political risk you have to withstand.
  • Market Risks – this type of risk refer to the chance that the market will become volatile. It always has the tendency to fluctuate and eventually decline in value. This risk is also known as the systematic risk, which affects all securities in the market in the same manner.

Diversifying Efficiently

If you want to be adequately diversified, you can try some tricks that are easily accessible to many markets.

You can spread your portfolio among many various investment vehicles, like cash, stocks, bonds, mutual funds, ETFs, and other funds. Then, you have to stay diversified for each type of your investment.

You can try and include securities that differ by sector, industry, region, market capitalization, et cetera. This should also be done with the bond market; include those that have varying maturities, durations, and credit qualities.

It goes without saying that you should mix things up and combine assets that vary in risk levels, always keeping in mind that diversification is not done once and then you leave it.