Investment risks are a critical topic for consideration. They arise due to various factors, such as market fluctuations, economic conditions, industry-specific challenges, regulatory changes, and unforeseen events. In this FXOpen article, we will delve deep into what investment risk management is and explore how to mitigate the negative effects for your trades.
Understanding Investment Risks
The danger of investment risks is the potential loss of capital or financial harm that traders may experience. Understanding risks is crucial for building a successful experience.
Market Risk
Market risk, also known as systematic risk, is the risk associated with the overall movements of the market. Economic data releases, geopolitical events, interest rate changes, and market sentiment can impact asset prices. Traders cannot control these external factors, making them inherent risks in trading.
Credit Risk
In the context of trading the global market, credit risk refers to the risk that a counterparty in a transaction may not fulfil its financial obligations. This type of investment risk may involve significant sums, and it often takes place through brokers or financial institutions.
Liquidity Risk
Liquidity risk refers to the risk that a trader may not be able to execute a trade promptly and at the desired price due to a lack of market participants willing to transact a particular asset. It's the risk of difficulty to enter the market at a desired price without slippage.
Inflation Risk
Inflation risk in trading refers to the risk associated with changes in countries' inflation rates and how they can impact the value of different assets. In forex, for example, there is a risk that the purchasing power of an asset will decrease due to rising inflation, which can lead to changes in exchange rates.
Political and Regulatory Risks
Regulatory risk is the risk of adverse changes in laws, regulations, or compliance requirements that can affect investments. Political risks are associated with the internal and external policy of a country and its impact on domestic assets.
Currency Risk
Currency risk occurs when investments are made in foreign currencies. Fluctuations in exchange rates can impact the returns of particular investments.
Investment Risk Management Strategies
For effective investment portfolio risk management, traders can employ various strategies, including:
Risk Assessment and Research
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