What is risk?
Risk is the chance of something happening that can impact an investment or financial responsibility. Measuring risk depends on the type of asset, the amount of capital used and the timeframes an investor plans to wait before selling. Risk can also be applied to other financial activities besides just investing, for example interest rates could rise after a mortgage has been taken out, potentially increasing its cost.
Different investments each carry their own inherent risks. For example, a low-risk investment could be buying into an index fund, such as the FTSE 100. This index aggregates the performance of the top 100 companies listed on the London Stock Exchange and pays dividends back to investors. Because they are very large companies, the chances of them all going out of business is relatively low. However because these are already large companies, their rates of growth will be much less than a smaller company that is growing from an emerging industry.
Investing in a small company or an emerging cryptocurrency is risky though, as it is yet to prove itself. However investors are able to buy more shares in exchange for their investment than investing in larger “safer” companies. This means that the returns can be potentially higher, but this also carries a greater risk.
There are also macro risks that can impact an investment. For example, a change of political direction could lead to more regulation for an industry, or the collapse of an industry due to resource shortages could also impact investments.