July 22, 2026 l Business Mirror
While we may think of making an investment as something good, you must understand that there are also certain risks involved. There are many risks in making any investment, some of the more common ones include liquidity, volatility, credit, documentation, security, market, fraud, political and carrying costs.
Liquidity is how quickly an investment can be sold and the proceeds paid back to the investor. This becomes a problem in less popular fixed income and equity securities, where there is a thin market. Real estate investments may also have liquidity issues when the demand softens and the buyers have dried up.
Volatility risks happen when the prices move up and down rapidly, which could catch a weak investor to take a loss on his investment particularly when they have a short-term investment horizon but have taken a long position with a higher term period.
Credit risks are when you make an investment in a corporate bond or equity shares but the company issuing the bonds or equity shares have gotten into trouble or goes bankrupt! When this happens, the value of these bonds or shares could drop or quite possibly even become worthless.
Documentation risks happen when you don’t have the proper papers to support your ownership or purchase of the asset. Such as when you buy a piece of property but the title document has errors in it or the bank did not provide you with a time deposit certificate.
Security risk is when your investment in bearer bonds or precious metals, can be stolen and would be difficult to trace the ownership of. Let us say you invested in a gold bar or coin, you would need to keep that in a secure place such a safe or bank safety deposit box. Otherwise, you are taking a higher security risk that it could be stolen.
Market risk is when the market sentiment moves or the demand weakens resulting in changing the demand for your investment. These macroeconomic movements are driven by many global factors such as a recession, military conflicts, weather conditions, calamities and pandemics.
The risk of fraud is always present which is why it is always highly recommended that you only deal with reputable counter parties. Fraud could cost you the entire value of your investment, so you need to pay attention and exercise due caution.
Politics always play a significant role in investments. When the domestic and foreign investors perceive that there is political uncertainty, investments in that country always declines. Investments in businesses that require government approval such those with a legislative franchise, licenses and bidding, carry the risk of change in those granting those approvals.
Investments that have a certain carrying cost such as the payment of real property tax, association dues, security, insurance, maintenance costs and administrative expenses will always be subject to the risk of increasing costs.
Investment risks need to be taken into account and only when the returns on such investments is more that the risk, should the investment be made.
***The views expressed herein are his own and do not necessarily reflect the opinion of his office as well as FINEX. For comments, email georgechuaph@yahoo.com. Photo is from Pinterest.