Today, there are large options of investment available to us through stock market, forex, security trading etc., but all of them entail some or the other forms of risks. Security trading can be very lucrative either by way of interest, dividends or capital gains. On the other hand, it also carries a lot of investment risks. If these risks are not handled properly, then security trading can become highly unprofitable. The major risks involved in investments include the Market risk, Credit risk and interest rate risk. The market risk may arise either by the securities in market or by the economy that makes it tougher for the bank to market the security. For example, unexpected distress of a specific sector can turn down the demand for securities in that sector. The credit risk implicates the possibility that the user may not succeed to abide his financial obligations. This may lead to the failure of redeeming the security or the failure of paying interest or dividend as contracted. In most of the cases, credit risk occurs because of the decline in financial position of the business. The interest rate risk occurs as a result of variations in the rate of interest. It is possible that the market value of securities may decline with the increase in interest rates. Theories have proved that higher the rate of interest, lesser is the value of the security. Thus looking at the structured policy, just like the board of directors formulate general policies involving its areas of operation, there is an equal need for the specific policies to be set in place for investment. A well laid policy helps in deciding the type, size, maturity and quality of securities to invest in. The fraction of bank funds to be paid depends on the approach of assets allocation, but the investment plan gives a more specific guide to the investment officer. A well-laid investment portfolio reduces the risk involved in investment. A good investment policy must include the sector, issuer, type, maturity and geographical locations in the policies. Another investment risk is involved in the stock market investment. Normally, investing in stocks can produce higher returns, but it is very important to handle risk in an effective manner to be successful. Bad economy can critically influence stock market prices and turn down your investments. Investing in stocks is completely depended on business risks. Your investment can factually go to zero if your preferred company goes bankrupt, but this risk can be reduced through diversification. Investing in forex market also entails a greater risk. Foreign exchange risk can be categorised into three kinds: translation, transaction and economic exposure. Most companies try to minimize the risk of variable exchange rates by using instruments like, Money Market Hedge, Forward Exchange Contracts, future options and Swaps. Investments certainly involve a large amount of risk in every sphere. Therefore you need to be extremely cautious when making any investments to ensure that your investment does not entail prominent risks and losses.
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