Previously, you are introduced to the different types of investments, now that it is good to know some types of risks to help you choose the types of investment that is suitable for you.

Business risk causes a company to generates poor sales and earnings for a period of time. The company's stocks and bonds have a direct relationship with sales and earnings of company. This means when the company is performing badly, so will its stocks and bonds. Shareholders' expectations of a company profit will also affect stock's price. E.g. if shareholders expect a decline in profit, they will quickly want to sell away their stocks, thus causing stock's price to decline. Examples of common stocks are home building, construction and automobiles companies. They are referred as cyclical stocks which means their stock's price flutuate with the business cycle.

Financial Risk is the inability of the company to pay back its debtors. It is measured in terms of the amount of debt the company holds in relation to its shareholders' equity. Financial risk can come along with business risk . E.g. When the company is not making much profit(business risk),it will have problem paying back its' debtors(financial risk). Since rating agencies rate the company's bonds by the ability to pay shareholders, that means the company bonds will be downgraded.

So is it possible to minimise these risks? Yes, of course.

You can minimize these 2 risks through diversification. It is to purchase different investment assets whose returns are unrelated.

Market risk is the movement of security prices, caused by external events. E.g. 9-11 terrorist incident or wars. Your time horizon will determine whether you will incur a loss in your investments. For e.g. if you need cash in a short period of time and that there is market risk involved, you will want to quickly sell away your stock for money. However , if you plan to invest in long term money , then stock prices will tend to appreciate in value.

Interest rate risk refers to the changes in market rates of interest, which affect all investment. High levels of interest rates tends to depreciate stock prices. This is because holding bonds would be more profitable than stock due to higher rates.

Inflation risk refers to the change in general pricing that erode future purchasing power of returns from investments. This means consumer purchases lesser goods and services in the future compared to now with the same amount of money. Assets value that moves with general pricing tend to perform better than other stocks in low-moderate inflation.

Event risk can be like political instability, government intervention, or a natural disaster . All these would deter investors from investing in a company thus causing it stock prices to drop.

Liquid Risk is the inability to convert an investment into cash quickly without loss in significant amount. If you are planning on short term investment, invest in high liquidity securities.

This is just a brief introduction of the different types of risks. Hope it will increase your knowledge about investment.