Every type of investment involves some level of risk, meaning some amount of uncertainty with the possibility of financial loss. Typically, investors who take higher investment risks are experienced and willing to go for it for the chance to achieve higher returns.

Risk can come in many forms:

• Inflation risk may pose a problem to investors who hold a lot of cash or are exposed to cash equivalents that can lose purchasing power in a rising interest rate environment. The same issue can occur with investments that offer fixed rate of returns that fall behind the rate of inflation.
• Investments that have restricted or thinly traded markets can pose liquidity risk to investors. When investments are illiquid, investors may be unable to buy or sell shares for an extended period of time. Even cash equivalent products like CDs can pose liquidity risk since they often charge penalties for early withdrawals.
• Volatility risk can be more prevalent in some industries and product types such as commodities and equity options. Even if an investment’s fundamentals are fairly sound, political events or market fluctuations can impact its performance.
• Stocks and bonds can pose business risk to investors since their returns are dependent on a company staying in business and remaining profitable. If the company goes into bankruptcy, its assets are liquidated and distributed in a systematic fashion. Bondholders are paid first, followed by preferred stockholders and finally common stockholders. Unfortunately, investors may only get some of their money back or nothing at all when a company is dissolved.
• If you invest in international stocks, there is also currency risk. It is very possible to lose money in a foreign stock if the country’s currency has depreciated more than the appreciation of the stock. Conversely, investors might get a boost if their foreign investment’s currency appreciates during the time of holding.