10 Important Investment Risks You Must Know

Source: KCLAU.COM & Kevin Chong, (Johor Bharu), Malaysia



What is risk ?
Risk is the probability that an investment’s actual return will be different than expected.
This includes the possibility of losing some or all of the original investment.
Some regard a calculation of the standard deviation of the historical returns or average returns of a specific investment as providing some historical measure of risk.
Financial risk is market-dependent, determined by numerous market factors, or operational etc.
Nowadays, many people lose money in the stock market. Why is this happening? It is because they don’t know how to control the existence of potential risk of investment. Therefore, it will make you lose money and feel hard to earn money from the stock market.
We must know that all investment activities will include some form of risk, such as losing money, stock risk, and market risk and so on. Although, I am still a newbie in stock market, but I have learned all golden investment rules from Warren Edward Buffet, and a local famous stock Teacher Lee Xin Hong. Both of them are my admired idols and teachers. I also have gained two years of experience by investing directly in the stock market.
Investing in stock is not an easy job, because we must always do all the research to assess the potential of a listed company, as well as the market condition too. If you don’t understand all the related facts about a company, it may cause you to lose all your money. It’s true.


Image by Vicki & Chuck Rogers via Flickr Here are the 10 important risks you must know before putting your money into the stock market.
Let’s go through all the type of investment risks：
1. Mismatch Risk: Trade the wrong investment product and it doesn’t suit your budget plan.
e.g : Budget Plan : RM5,000; The stock you bought : RM5,500

2. Inflation Risk: Return of investment (ROI) is less than the market inflation rate.
e.g. Return of investment (ROI) : 5%; Market Inflation rate (IR) : 8.5%

3. Interest Rate Risk: The change of interest rate may decrease the return of investment.
e.g. current interest rate : 2.0 %; Interest rate of the time you bought it : 3.5%


4. Market Risk: Stock market goes up and down according to the market trend, meaning that your return of investment can increase or decrease at such a time.
e.g Current stock price : 0.500; Bought price : 0.470 ( may goes up or down )


5. Market Timing Risk: Trade without knowing the market trend, for example: Current trend is a downtrend. That means that you’ve enter at the wrong time to buy stock. You must always buy during uptrend.


6. Non-diversification Risk: Don’t put all your eggs in one basket
e.g. Cash on hand: RM5,000, put all money in the stock market. You should diversify into fixed-deposit RM 2,500, stock market: RM2,500. If you lose money, you still have RM2,500 on hand.


7. Liquidity Risk: When you want to sell the stock you are currently holding, there is nobody there to buy your stock, meaning that there is no volume in that stock.


8. Gearing Risk: You borrow money from bank or friends to invest. If you lose money, you are unable to cover all the losses.


9. Legislative Risk: The change of investment bank rules may affect your investment plan.

10. Personal risk: scare and greedy. Warren Buffet once said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”. This is the method of reverse investment in stock market.

Finally, if you are a newbie to the stock market just like me, I will strongly encourage you to adopt a long-term investment plan with a small token to gain some experience first, make sure you are familiar with it. Don’t ever test water with both feet. And, always remember that you are either you a winner, or a loser in the stock market.

Leverage in Investment

Source: KCLAU.COM

Leverage means The use of credit or borrowed funds to improve one’s speculative capacity and increase the rate of return from an investment, as in buying securities on margin.

Investing is already a high risk activity, according to those not used to do investment. If to use leverage in our investment, it means the risk involved is even higher. But only with the proper use of leverage, a person can grow rich even faster. We must have heard that most wealthy people actually had gone through some difficult years prior to their success. Normally, they are able to double their income every year after those initial struggle. They certainly use some form of leverage. Example:

1. Buying property with bank’s money. In order to own a RM100,000 real property, we only need to pay 10% down payment of RM10,000 for residential property. When the property appreciate to RM110,000, we made a gain of RM10,000, which is a 100% return from our initial RM10,000.

2. Buying warrant instead of it’s mother share. Warrant itself is a form of leverage. When the share price rises 10 sen, the warrant will normally follow by 10 sen as well. Those who bought warrants know that warrant is a derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.

3. Borrowing money to do business. That’s how entrepreneurs are able to build their wealth in a short period of time ( 3-5 years). They use the bank’s money by paying them 4-9% interest, but are able to produce more than 20% return per annum in their business.

If we can learn the art of using leverage, we will be able to grow our wealth much faster!