Accounting Rate Of Return Is Based On Cash Flow Learn Investment Risks – Stock Investment Risk and Forex Risk

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Learn Investment Risks – Stock Investment Risk and Forex Risk

Generally, investing in stocks can provide higher returns than bonds and real estate. However, stocks carry some investment risks. A successful investor should be aware of the different types of investment risks involved.

Stock Investment Risks:

The biggest risk for stock market investors is financial risk. A bad economy can seriously affect stock market prices and go against your investments.

Investing in stocks is subject to business risk. Your investment can go to virtually zero if your chosen company goes out of business or goes bankrupt, but you can reduce this type of risk through diversification. If you diversify properly and invest in different types of stocks, the associated risks can be controlled or reduced.

If you invest in new or small companies, you may be exposed to the risk of upside in stocks. Growth stocks are very sensitive to fluctuations in interest rates. Any bad news about a company can drop the share price dramatically.

Forex Risk:

Managing foreign exchange (or forex) risk is essential to successful investing in the foreign exchange market.

Foreign exchange exposure or risk can be classified into three types: transaction, translation and financial exposure.

Transaction exposure refers to the extent to which a company’s future cash transactions may be affected by any change in currency exchange rates.

A translation exposure is an accounting exposure. It measures the impact of exchange rate changes on a company’s group financial statements.

Financial exposure measures the impact of exchange rate changes on a firm’s cash flows and earnings.

Most companies try to reduce the risk of fluctuations in exchange rates by using hedging instruments such as forward exchange contracts, money market hedges, futures, options and swaps.

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