Volatility and risk both are important parts of investment that work together. Whenever you think about volatile investment, the thought of risk also comes with it. It is difficult to select the fund that provides you best risk-reward management.
Many traders have a question in their minds that always confuse them while trading. How are volatility and risk related to investment?
Generally, the risk is clarified as the return of the abstract or unclear return of a volatile investment. It is related to volatility in a way that the increase and decrease in volatility ratio affect risk chances a lot. It is linked with volatility because of returns and benefits.
It can be said that volatility can be used to measure the risk ratio and possibility. As you start trading, the first thought that comes to your mind is whether you can get profit from it or not. You must think about risks that come in your way.
It must be noted that a market with high volatility brings more risks in trades in comparison to non-volatile trading markets. Let’s try to understand it more deeply by reading this post!
Relationship of Volatility and Risk
It is important for forex traders to know about volatility and risk deeply. It is crucial for new traders as they are unaware of the ups and downs of this trading world. Basically, Risk and volatility are totally different measurements of investment.
Both get changes in different time periods. The most prominent and clear element of the forex market is volatility. It works like a variable. On the other hand, risk is an uncertain and symbolic term.
Investment risks get a higher position with the increasing volatility of the market. It is not always true that more volatility brings risk for you. Sometimes it happens but actually, it depends upon your trading strategy and market conditions.
By using Hedge Funds, it is possible to gain high profits with increasing volatility of the market. Remember that this type of investment is not suitable for everyday traders.
8 Types of Risks Related To Investment
There are numerous risk types that relate investment to different risks appearing while trading. The most famous among them are 8 that are listed below. Let’s see how investment-linked with these types of risks.
1. Credit Risk
It is a type of risk that is related to investment in conditions when it is impossible for a borrower to return the money that he borrowed from a lender or a bank. It is also called default risk. It happens because of the bad financial position of the trader who borrowed money.
To avoid this a trader has to understand the plenty of investing amount provided by the bank or lender. Practicing Capital Risk Management is helpful in this matter.
2. Liquidity Risk
Liquidity risk is related to investment in a way it comes because of the deficiency of market requirements or desires for investment. That’s why it is difficult for a trader to buy or sell these capitals without facing loss.
These investments cannot be converted into cash so quickly to get any benefit from them.
3. Horizon Risk
A type of risk in which you have to face a sudden cut down of investing amount is called Horizon Risk. For example, you are stuck in a bad financial situation and there is no way except to sell your investment at any rate.
Maybe these investments prove beneficial for you in the future But you have to sell them at a low cost to manage your poor position.
4. Inflation Risk
Inflation Risk is a type of risk that runs the cash that comes from investment. It may not value able in the future because there comes different changes while purchasing process.
These changes happen because of the power of inflation that is closely related to investment. In forex trading, currency pairs with a high inflation rate are a big cause of losses and failure in trading.
5. Longevity Risk
Most insurance companies and pension funds go through this critical condition. It happens when corporal rates and all expectations go against you.
So, the companies that invest in it, face loss due to longer life than expectations. In this way, funds go down and there may be a shortage of funding amount.
6. Concentration Risk
This type of risk comes in investment due to proceeding portfolio from a region or a country. These concentration risks appear from various portfolios that are closely related to investing funds.
It is the main reason behind the failure of many traders. It is also described the risk level banking investments.
7. Reinvestment Risk
As it is clear from the title of the risk that it is not possible for an investor to invest again the rising cash comes from previous capital.
It is not necessary that an investor can reinvest the capital at the same rate of return. There are big chances to earn less money than before as you invest it again.
8. Market Risk
As the name shows market risk is related to the trading conditions of the market. It is based on the price and income that is raised by the securities of mutual funds. Generally, these are the reaction of specific events, funds owned by companies, economical and market conditions, changes that occur in currency rate and interest.
These are all the basic reasons that linked Market Risk with investment.
Frequently Asked Questions
Usually, the risk is the degree of Variability linked with the return of volatility or benefit. Simply, it is the return of an investment or fund. It is a systematic risk because of unique individuality.
Do investors like volatility?
Yes, they do as it is a good and profitable term for investors. There are a lot of hopes to earn money in the heavy trading market. It may also provide a good opportunity to trade in swing trading for short-term profit.
What is the inflationary risk?
It is also defined as Purchasing power risk. In it, inflation will undermine the actual value of cash made by an investment. You can understand it clearly by fixed-income investment.
Now, you are fully prepared to trade in the forex market with full confidence. This post will prove a complete guideline about the relationship of volatility and risk with investment.
You can calculate risk and volatility with the help of several ways. Be careful about the loss ratio as it should not be higher. To avoid failure in trading, you must have a well-organized investment strategy.
Risk stops you to achieve your goal of investment and create hurdles in your trading plans. You can avoid this by analyzing yourself keenly and updating with market conditions.
Remember that there are too many risks that occur in high volatility so you must be careful. Do you have any questions in your mind? Don’t be shy from asking us.