Risk Flashcards
Capital Risk
Relates to movements in share price
Dividend Risk
The amount of dividend income paid out is variable and depends on the net profits the company makes (if any). There are no guarantees
Currency Risk
Where shares are held in currencies other than UK Sterling there is the risk that the £ may strengthen against the overseas currency once it is converted back into UK £ Sterling.
Liquidity Risk
Applies to both direct and indirect investments in shares. The sale of a share is only going to be possible if there is a buyer for it. For shares in smaller companies this may not always be the case.
Liquidity is about how quickly an investor can access their capital when they need it. The risk is that penalties may be payable, for example on an early withdrawal from a notice account or that they will be forced to sell their investment at a price below its fair value.
Counterparty Risk
This is the risk that the company with whom the investment is placed becomes insolvent.
Regulatory Risk
Investors who place their capital in regulated investments will have some comeback in the event of the provider becoming insolvent.
Market Risk - Systematic Risk
The risk that there may be a fall in the value of an asset due to issues impacting on the market as a whole.
Cannot be reduced by diversification.
Investment Specific - Unsystematic Risk
The risk that there may be a fall in the value of an asset as a result of a specific event or circumstances particularly its issuer.
Can be reduced by diversification.
Inflation Risk
Deposit backed and fixed interest rate investments are the assets most at risk from inflation over the medium to long term.
The risk that the value of these assets or the income they produce will decrease as inflation erodes spending power.
Inflation is generally caused by rising demand for goods and services which puts more money into the economy. Inflation slows as the business cycle approaches recession.
Interest Rate Risk
Interest rate risk is about being trapped in the wrong type of interest vehicle at the wrong time.
Rising interest rates are good news for deposit holders on variable rates and bad news for deposit holders tied to fixed interest rates and for those with fixed interest investments.
The opposite is true when interest rates fall.
Short term interest rates are used by the Bank of England to control inflation. As inflation rises, interest rates will be put up to slow it down, as inflation falls, interest rates will fall too to stem the fall.
Credit Risk: Default Risk
The possibility that the issuer will fail to make payments as agreed.
Credit Risk: Downgrade Risk
A reduction of the issuer to continue to make payments as assessed by the market or ratings agency.
Credit Risk: Credit Spread Risk
When investors become nervous they will tend to purchase government bonds rather than corporate bonds to spread their risk.
Credit Risk: Counterparty Risk
The risk a counterparty will not pay what it is obliged to on a bond, derivative, trade or other transaction.
Event Risk
This is the risk of the value of an asset falling due to a major unexpected event such as a natural disaster, takeover or regulatory decision.
