Understanding risk is critical when investing; no discussion of returns or performance is complete without mentioning risk. However, it’s challenging for new investors to determine the risk and distinguish between low risk and high risk for new investors.
When it comes to investing, the risk is often measured by volatility. Usually, a more volatile investment has a higher risk than a less volatile investment. You can observe volatility by the daily or weekly price swings; the larger the price, the greater the volatility.
Risks also include other factors like recession, inflation, and other economic hazards that affect the entire market, which are called systematic risks. Meanwhile, you can reduce other—unsystematic—risks through the diversification of holdings and include industry and company-specific hazards such as default or regulatory risks.
A high-risk investment has a high percentage chance of capital loss or underperformance; or a high possibility of a catastrophic loss. When choosing this instrument, you’re exposed to the likelihood of losing all or a portion of the investment.
Most investors have the prospect of generating positive returns over time. However, some tend to seek higher yields in a shorter period. As a result, they are drawn to instruments that may result in asset write-downs.
Examples of high-risk investment
FOREX is an abbreviation of foreign exchange. As the name implies, FOREX is a type of trade that involves buying and selling foreign exchanges. Since the trading range spans the entire globe, the FOREX market has the world’s largest and most liquid assets. However, it’s high in risk as the market is fluctuating. It is worth noting that in Malaysia, FOREX trading is illegal under the Exchange Control Act 1953 except when buying or selling from an authorized dealer.
Venture capital is investing your money in private-sector companies in their early stages. It’s regarded as a risky long-term investment due to the high likelihood that many companies will only gain little. It is also risky because without a track record among these start-ups, it becomes difficult to gauge their performance. Granted these companies are in their infancy, they may not have the sophistication or access to complex data and wider market information.
Cryptocurrency and digital currency
Lately, this instrument has been gaining popularity. It’s a digital currency created using encryption techniques and managed by a peer-to-peer network. For now, cryptocurrency is the riskiest investment. You can gain 100% overnight or lose all the next day; it’s hard to predict. To start, you must first deposit and exchange your Ringgit funds into any of the cryptocurrencies.
Low-risk investment is an investment with a relatively small possibility of losing some or all of your money. Essentially, with low-risk investing, there is less at stake, either in terms of the amount invested or the investment’s significance to the portfolio. However, there’s also less to gain, either in the potential return or the potentially more significant benefit.
Examples low-risk investment
A fixed deposit is an investment instrument offered by banks (or sometimes non-bank financial companies) that generates a fixed interest rate until the maturity date. It’s similar to saving accounts, but the interest rates are fixed, so the returns are guaranteed (not influenced by market fluctuations).
Stocks (Bursa Malaysia)
This investment allows you to purchase a small unit of a publicly-traded company’s ownership. So, technically, you own a small fraction of the company. If you pick a well-performed business, e.g., stocks in FBM KLCI (FTSE Bursa Malaysia KLCI) list, stocks can be a low-risk investment. However, small-cap companies are often regarded as riskier compared to blue-chip stocks. Small-caps are usually up-and-coming young listed companies that are growing rapidly. Small-caps are usually priced cheaper than their steadier blue-chip counterparts.
A unit trust is a regulated arrangement that pools money from investors (both individuals and institutional) into a collective investment scheme. The fund manager then specifies which instruments to choose; this directly reflects the risk rating for the fund. Remember that each unit trust fund would look at different industries, segments, and markets. Most unit trusts are focused on domestic stocks. There are those which has regional or international exposures. These options cater do different investors risk appetite.
Conversations about investing is never complete without considering the risks. While historical and projected returns may give some indication on potential trends, you should never invest without first learning about its volatility and overall risk. Make sure you do your homework before deciding on an investment product. Consulting with financial advisors and qualified investment professionals may help you make informed decisions based on your financial goals, investment horizon, and risk appetite.
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