Investing is always risky. He, alas, is her inalienable companion. But if you know your enemy by sight, then you can take certain actions aimed at minimizing possible harm. And then the question arises – what are investment risks?
General information
First, let's get some terminology out of the way. What is investment risk? This is the probability of incurring unforeseen financial losses in a situation where there is uncertainty in the terms of the investment. What can contribute to the loss of money? As an answer to this question, a number of groups of factors and sources are distinguished. In addition, risks come in different forms. And if there is an assumption about possible losses, this does not mean that they will definitely occur and will be in exactly the same amount. After all, the investor has many ways to minimize them (for example, with the help of insurance). But let's talk about everything in order, let's not rush too much.
About species diversity
There are many optionsoccurrence of financial losses. In practice, the following types of investment risks are distinguished:
- Inflationary.
- Market.
- Operational.
- Functional.
- Selective.
- Liquidity risk.
- Credit.
- State.
- Risk of lost profits.
All these types of investment risks will be considered in detail. Let's start with inflation. They are understood as the probability of losses that may be incurred due to the depreciation of the real price of investments, the loss of the original real value (even if the nominal valuation remains or grows), a decrease in the size of expected income and profits. And inflation is to blame. By the way, there is another interesting point, which is almost not paid attention. This is a deflationary risk. In simple terms, this is the probability of losses in the event of a decrease in the amount of money supply. This may be due to the withdrawal of part of the funds through tax increases, budget cuts, increased savings, discount interest rates, and the like. Speaking about investment risks, one cannot ignore the market and its influence. What is it? Market risk refers to the possibility of adjusting the value of assets due to fluctuations in exchange rates, prices of bonds and stocks, goods (in which investments are made), interest rates. Therefore, if an enterprise uses financial instruments, it is necessary to be very careful with them. After all, this is potentially both a front of growth and a fall.
About workbusinesses
Let's look at other types of risks. They are largely tied to the enterprise in which the funds were invested. And this:
- Operational risk. It represents the probability of incurring investment losses due to technical errors in the implementation of activities: due to unintentional actions of employees; emergency situations; security breach; failures of computer equipment, equipment and information systems and the like.
- Functional risk. This is the probability of incurring monetary losses due to errors that were made during the formation/management of the collected portfolio of financial instruments.
- Selective risk. It refers to the probability of making the wrong choice when choosing an investment object compared to other options.
- Liquidity risk. This implies the likelihood of losses, which are caused by the impossibility of releasing investment funds in the required amount without loss in a short period of time due to the state of market conditions. It is also understood as the occurrence of a shortage of funds that are needed to fulfill obligations to counterparties.
- Credit risk. Occurs when borrowed funds are used for investment. It manifests itself in the form of the probability of a change in the price of assets / loss of their original quality due to the inability to fulfill their obligations.
- State risk. This is the probability of a loss of invested funds thatare under the jurisdiction of a certain country, which is associated with an unstable economic and social situation.
- Risk of lost profits. This implies the likelihood of incidental (indirect) financial damage (expressed in lost or lost profits) due to not carrying out a certain event. For example - insurance.
A little more about classification
It is necessary to understand that such a division is very conditional. After all, it is quite difficult to draw clear boundaries between them. Many investment risks correlate with each other, that is, they are interconnected. There is also a classification depending on the scope of their occurrence, the presented form and sources. This also deserves attention. But the classification is carried out not only for a clear understanding of what you have to deal with, but also for making certain decisions that will minimize the negative impact. In this case, it is very useful to understand what you are dealing with. Otherwise, losses may increase. But they are undesirable for every structure that is interested in development and prosperity.
About the realm of occurrence
Financial investment risks can appear in six groups of factors. First of all, it is necessary to remember the technical and technological sphere. What do you need to know here? In it, the greatest interest is provided by the uncertainty factors that affect the technical and technological component of the activity during the implementation of the project. Asexamples include the reliability of equipment, the level of automation, the predictability of production processes, the rate of improvement of equipment, and the like. Then there are the risks of the economic sphere. They are associated with uncertainty factors that affect the economic component of investment activity within the state and the target setting. In this case, the impact may have:
- acceleration/deceleration of GDP growth;
- state of the economy;
- government-implemented budgetary, investment, tax and financial policy;
- conjuncture;
- regulation;
- sustainable development and independence;
- non-fulfillment by the state of its obligations, defaults, partial or full embezzlement of capital and many other points.
And the question arises - is it justified? Maybe some moments are better viewed as risks in the political sphere? No. And let's see why. The fact is that they include only those risks that affect the political component in the conduct of investment activities. Namely, elections at various levels, changes in the situation in the echelons of power, the chosen course of development, foreign policy pressure, separatism, freedom of speech, deterioration of relations between different territories, and the like.
About "human" realms
Three we have already considered. There are still so many left. And the next area of risk is social. It is associated with factors that affect the human component. An example is the soci altensions, implementation of aid programs, strikes. This area can also generate positive moments, such as the creation of ties between individuals, mutual assistance, compliance with obligations, service relations, material and moral incentives. Although they can also become harmful at the same time. As an example, the decision to promote an employee from a department is made not on the basis of his qualities, but on his personal disposition. Separately, it is worth mentioning the personal risk. It is based on the fact that it is impossible to accurately predict the behavior of certain individuals in the process of activity. The next area of risk is legislative. It includes factors that may affect the implementation of investment projects. These include changes to existing legislation; inadequacy, inconsistency, incompleteness, incompleteness of the legal framework; lack of independent arbitration and judiciary; incompetence of people accepting documents (or lobbying of interests by a certain group of people) and so on.
About the environmental field
It is certainly important, because we live in the conditions of nature. And at the same time, it is so large that it could not be pushed into the part with human spheres. So what are these environmental investment risk factors? The fact is that there are certain moments that affect the environment in the region, the state, and the activities of invested objects. What exactly? This includes environmental pollution, environmental disasters, programs, movements,radiation environment. Conventionally, three subgroups of risks can be distinguished here. This is:
- Technogenic risks. These include emergencies that arise as a result of disasters at enterprises, as well as contamination with poisonous, radioactive and other harmful substances.
- Natural and climatic risks. This includes various cataclysms (such as floods, earthquakes, storms); the specifics of the conditions in which the object is located (arid, mountainous, sea, continental terrain); forest and water resources; minerals.
- Social risks. This is a subgroup that includes factors that may affect the process of implementing an investment project. These include the incidence of infectious diseases in the population/animals; anonymous calls about mining facilities; mass spread of weeds.
The investment risk of a region can increase significantly if it has dangerous production. Although for its qualitative assessment it is necessary to take into account many different points.
About Forms
And now on to the next set. And now we will talk about how they are presented in practice. Investment risk management highlights two important points. Specifically:
- Risks of real investment. This is an increase in prices for necessary goods, interruptions in the supply of equipment and materials, the choice of unscrupulous and / or unqualified contractors and other factors due to which the commissioning of the facility is delayed or reduces its income.
- Risks of the financialinvestment. These include an ill-considered choice of financial instruments, as well as unforeseen changes in investment conditions.
That's it.
On sources of risk
Investment risk analysis begins with this. Conventionally, they can be divided into:
- Systematic (non-diversifiable, market) risk. It occurs in everyone who conducts investment activities. Its probability depends on the stage of the economic cycle, the level of effective demand, changes in tax legislation and other factors that cannot be influenced.
- Non-systemic (diversifiable, specific) risk. Its peculiarity is that it is characteristic only for a certain object (or investor). For example, it may be associated with increased competition in the selected market segment; the professionalism of the management staff; irrational capital structure and so on. It can be prevented by choosing the optimal investment portfolio, diversifying projects, and effective management.
Minimization
As you can see, there are a lot of potential problems. But can they be eliminated? Unfortunately no. But the reduction of investment risks is quite possible to realize. What contributes to this? Effective management, qualified personnel and insurance will minimize the risks to the maximum. And if the first two points largely depend onapproach to the organization and the qualities of the investor himself, then the third should be given more attention. Indeed, in the modern world it is difficult to imagine investment risk management without insurance. But this approach also has a negative side - the price. If we talk about transactions and investments, then the amount of the insurance payment will range from 1% to 9%. A more accurate value depends on what kind of investment risk conditions. For example, if investments are planned in a country to which there are no claims in terms of respect for private property, independence of the judiciary, and so on, then the rate will be low. In the event of unfortunate circumstances, it will increase, and it is possible that insurance will not be produced at all. In general, various investment risk assessment methods are used to create a more accurate picture. After all, the task of insurance companies is to make money on potential danger, and not to compensate for someone's losses. If we talk about countries, then the approach is practiced when the level of investment risk is formed for each. This is considered as an initial estimate. It can affect, for example, the maximum sum insured for investments. Then individual conditions are selected for a specific situation.
Conclusion
Here, in general, is the whole theoretical minimum about investment risks. Although the article turned out to be quite large, but much more could be said! Both the assessment of investment risks and specific examples of their impact on organizational structures under certain conditions, andmany other things. By the way, a few more words about management. As already known, nine types of risks are distinguished (even if such a division is very conditional). If we are talking about a small investment in a small business, then the existing experience may well be enough to assess the situation, as they say, by eye. But if significant investments are discussed, and even in foreign business, then a very detailed study of opportunities and risks will not be superfluous. And it is desirable to attract a specialist. And it is very necessary that he specializes in risk management in a certain country, in which investments are planned. After all, even if he is a master of his craft, ignorance of all the ins and outs can play a cruel joke, which will result in financial losses.
