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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.

Types of Financial Risks

There are several types of financial risks:
  1. Currency Risk
  2. Liquidity Risk
  3. Political Risk
  4. Market/Sector Risk
  5. Downside Risk 
You may want to read about Skewness Risk & Kurtosis Risk

1. Currency Risk - also known as Exchange Rate Risk - is the financial risk of an investment's value changing due to the changes in currency exchange rates.

The currency risk also affects people that are not trading or investing, because all bank accounts or cash  holdings, credits (loans), salaries and prices are denominated in a specific currency. When the exchange rate changes dramatically the currency valuation is impacted.

Currency risk of foreign currency deposits devaluation can be hedged using derivatives (like Foreign Exchange Contracts for Difference).

2. Liquidity Risk - Liquidity risk is the risk results from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss. A liquid asset is an asset that can be converted into cash quickly, with minimal impact to the price received in the open market.

Usually higher the yeld, lower the liquidity. Liquidity risk can be mitigated by adjusting the investment time horizon to your liquidity needs.

3. Country risk - also known as Political Risk - is a collection of risks associated with investing in a specific country (your country or a foreign one). These risks include political risk, exchange rate risk, economic risk, sovereign risk and transfer risk, which is the risk of capital being locked up or frozen by government action.

Political risk can be mitigated by diversifying investments worldwide.

4. "Market risk" and "Sector risk" - Market risk  is the possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets in which he is involved.

Sector risk can be mitigated diversifying investment across multiple sectors of an economy. In the same way, market risk can be avoided using a mix of investment in multiple markets.

5. Downside Risk - also known as "volatility", or "beta", or inherent risk,  unfortunately the only risk considered by most investors (and the only risk feared by non-investors) - is an estimation of a security's potential to suffer a decline in value if the market conditions change, or the amount of loss that could be sustained as a result of the decline.

Usually the downside risk can be mitigated by adjusting the right time horizon to your risk tolerance profile. It also can be hedged.


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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.

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Trading carries a high level of risk, and may not be suitable for all investors. You should never invest money that you cannot afford to lose.