A risk is termed as the possibility that the expected returns in a business will not be met upon the calculation of the actual yield (Business Directory, 2018). There are many types of risks involved whenever a business or business idea is put forward. It is essential to carry out proper risk analysis before investing. This reduces the chance of experiencing losses which may cause permanent damage to an individual's or company's business. A return, on the other hand, is termed as the money made or lost in a trade (Staff, 2018). A return can be either positive or negative depending on how well the investment did. There are many types of risks in investment. Some of them are addressed below.
First, there is the market risk which entails the inability to sell an investment due to the advancements in technology or presence of better investments. Under market risk, there are several other sub-branches such as interest rate risk, equity risk and currency risk (Finance Train, 2018). In addition to this, there is liquidity risk which is the inability to sell one's investment and get money from it whenever it is needed. It is the inability to convert the assets of investment into cash or security whenever required. The third risk is the inflation risk whereby an investment loses its purchasing power.
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Furthermore, there is longevity risk which is a situation when a person does not live long enough to utilize their savings. This risk is significant in retired people or those who are on the brink of retirement. Moreover there is the risk of foreign investment which affects people who invest in countries which are not their own (Ontario Securities Commission, 2018). This is a sample of the risks that one has to evaluate to avoid cases of failure in an investment properly.
Also, there are only two types of returns. A positive return is called a profit and is gained when an investment prospers. A negative return occurs when the venture fails causing it to lose some of the initial capital. The term nominal return is the total profit or loss made by an investment without considering inflation over a period.
Historical perspective of returns and risks
As a means of coping with the risks involved in an investment, it is wise to consider past experiences as well as the origin of the term risk and returns. After the end of the second world war, Beck and other researchers wanted to document the development of the new world. They, therefore, researched the problems that the people faced as they tried to build themselves from the ravages of the war. They assessed the decisions made by the people and the effect of these decisions on the people.
Investment companies
Investment companies are private or public firms that manage, buy and sell funds to the public (Business Jargons, 2018) They are a made up of a group or groups of investors who come together as one firm that buys and sells securities. There are three major types of investment companies as explained below. Open-end management investment companies are companies that collect money from investors and use the accumulated capital to invest in stocks, bonds, and other securities. Professional managers run them, and they allow the investors to buy or redeem their shares. These companies only trade once per day.
Moreover, there are investment trusts also known as closed-end management investment companies. They have the same structure as open-end management investment companies. Unlike the open end management, they are stricter in management. They also allow their clients to buy or sell stocks throughout the day. Finally, there are unit trusts which do not have a lot in common with the two other companies. They have the least investment requirement and only offer fixed portfolios to those who invest in them.
References
Business Directory. (2018). When was the last time you said this? Retrieved from http://www.businessdictionary.com/definition/risk.html
Business Jargons. (2018). “What are Investment Companies? Definition and meaning.” Retrieved from https://businessjargons.com/investment-companies.html
Finance Train (2018). “Types of Market Risk.” Retrieved from https://financetrain.com/types-of-market-risk/
Ontario Securities Commission. (2018). “Types of investment risk | Understanding risk | GetSmarterAboutMoney.ca.” Retrieved from https://www.getsmarteraboutmoney.ca/invest/investing-basics/understanding-risk/types-of-investment-risk/
Staff, I. (2018). Return. Retrieved from https://www.investopedia.com/terms/r/return.asp
