Investment activities are always risky. Alas, he is her integral companion. But if you know your enemy in person, then you can take certain actions aimed at minimizing possible harm. And then the question arises - what are investment risks?
general information
Initially, let's deal with terminology. What are investment risks? This is the probability of incurring unforeseen financial losses in a situation where there is an uncertainty in the investment conditions. What can contribute to the loss of money? As an answer to this question, there are a number of groups of factors and sources. In addition, risks come in many forms. And if there is an assumption of possible losses, this does not mean that they will occur and will be in exactly the same volume. After all, the investor has many ways to minimize them (for example, through insurance). But let's talk about everything in order, let's not rush too much.
About species diversity
There are many options for the occurrence of financial losses. In practice, these types of investment risks are distinguished:
- Inflationary.
- Market.
- Operating.
- Functional.
- Selective.
- Liquidity risk.
- Credit.
- State.
- Risk of lost profits.
All these types of investment risks will be considered in detail. And let's start with inflationary ones. They mean the probability of losses that may be incurred due to the depreciation of the real price of investments, loss of the initial real value (even if the nominal value is maintained or growing), and a decrease in the expected income and profit. And inflation is to blame. By the way, there is another interesting point, which is almost not given attention. This is a deflationary risk. In simple words, this is the probability of losses in the event of a decrease in the amount of money supply. This may be due to the withdrawal of part of the funds through raising taxes, reducing budget expenditures, increasing savings, interest rates and the like. Speaking about investment risks, one cannot ignore the market and its impact. What does it consist of? Market risk means the probability of adjusting the value of assets due to fluctuations in exchange rates, prices of bonds and stocks, goods (in which investments are made), and interest rates. Therefore, if the company uses financial instruments, you must be very careful with them. After all, this is potentially both a front of growth and a fall.
About the enterprise
Let's look at the other types of risks. They are largely tied to the enterprise in which financial assets were invested. And this:
- Operational risk. It represents the likelihood of investment losses due to technical errors in the implementation of activities: due to unintentional actions of employees; emergency situations; security breach; failures of computer equipment, equipment and information systems and the like.
- Functional risk. This is the probability of financial loss due to errors that were made during the formation / management of the collected portfolio of financial instruments.
- Selective Risk. It means the probability of making the wrong choice when choosing an investment object compared to other options.
- Liquidity risk. This implies the probability of losses that are caused by the inability to release investment funds in the required amount without loss for a short period of time due to the state of the market. Also, it is understood as the occurrence of a deficit of funds that are needed to fulfill obligations to counterparties.
- Credit risk. It arises if borrowed funds are used for investment. It manifests itself in the form of the probability of a change in the price of assets / loss of their original quality due to the inability to fulfill their obligations.
- Government risk. This is the probability of loss of invested funds that are in the jurisdiction of a particular country, which is associated with an unstable economic and social situation.
- Risk of lost profits. This implies the likelihood of collateral (indirect) financial damage (expressed in lost or lost profits) due to the failure to conduct a specific event. For example, insurance.
A little more about classification
It must be understood that such a separation is very conditional. After all, to draw clear boundaries between them is quite difficult. Many investment risks correlate with each other, that is, they are interrelated. There is also a classification depending on the scope of their occurrence, the presented form and sources. This also deserves attention. But the classification is carried out not only for a clear understanding of what you have to deal with, but also for making certain decisions that will minimize the negative impact. In this case, it is very useful to understand what you are dealing with. Otherwise, losses may increase. But they are undesirable for every structure that is interested in development and prosperity.
About the scope
Financial investment risks can appear in six groups of factors. First of all, it is necessary to recall the technical and technological sphere. What you need to know here? In it, the most interesting are uncertainty factors that influence the technical and technological component of the activity during the implementation of the project. An example is the reliability of equipment, the level of automation, the predictability of production processes, the rate of improvement of equipment, and the like. Then the risks of the economic sphere follow. They are associated with uncertainties that affect the economic component of investment activity within the state and the target. In this case, the impact may have:
- acceleration / deceleration of GDP growth;
- state of the economy;
- state budget, investment, tax and financial policies;
- conjuncture;
- regulation;
- sustainable development and independence;
- non-fulfillment by the state of its obligations, defaults, partial or full appropriation of capital, and many other points.
And the question arises - is this justified? Could some be better viewed as political risks ? No. And let's see why. The fact is that they include only those risks that affect the political component in the conduct of investment activities. Namely, the holding of elections at various levels, changing the situation in the echelons of power, the chosen course of development, foreign policy pressure, separatism, freedom of speech, deterioration of relations between different territories and the like.
About the "human" spheres
Three we have already considered. There is still as much left. And the next area of risk is social. It is associated with factors that affect the human component. Examples include social tensions, the implementation of assistance programs, and strikes. This area can also generate positive aspects, such as creating relationships between individuals, mutual assistance, compliance with obligations, official relations, material and moral incentives. Although they can also become harmful at the same time. As an example, the decision to promote an employee from a department is made not on the basis of his qualities, but on his personal disposition. Separately, it is worth mentioning personal risk. It is based on the fact that it is impossible to accurately predict the behavior of certain individuals in the process of activity. The next area of risk is legislative. It includes factors that may affect the implementation of investment projects. These include changes to existing legislation; inadequacy, inconsistency, incompleteness, incompleteness of the regulatory framework; lack of independent arbitration and legal proceedings; incompetence of people accepting documents (or lobbying for interests on the part of a certain group of people) and so on.
About the environmental sector
It is certainly important, because we live in nature. And at the same time it is so large that it could not be pushed into the unit with the human spheres. So what are these environmental investment risk factors? The fact is that there are certain points that affect the environment in the region, the state, and the activities of invested objects. What exactly? This includes environmental pollution, environmental disasters, programs, movements, radiation conditions. Conventionally, there are three subgroups of risks. It:
- Man-made risks. These include emergency situations that arise as a result of disasters at enterprises, as well as contamination with poisonous, radioactive and other harmful substances.
- Natural and climatic risks. This includes various disasters (such as floods, earthquakes, storms); the specifics of the conditions in which the object is located (aridity, mountain, sea, continental terrain); forest and water resources; minerals.
- Social and household risks. This is a subgroup that includes factors that may affect the process of implementing an investment project. These include the incidence of population / animals with infectious diseases; anonymous calls about mining objects; mass distribution of weeds.
The investment risk of a region can increase significantly if it has hazardous production. Although for its qualitative assessment it is necessary to take into account many different points.
About Forms
And now move on to the next set. And now we’ll talk about how they are presented in practice. Investment risk management highlights two important points. And more specifically:
- The risks of real investment. This is the increase in prices for necessary goods, interruptions in the supply of equipment and materials, the choice of unfair and / or unskilled contractors and other factors that delay the commissioning of an object or reduce its income.
- The risks of financial investment. These include an ill-considered choice of financial instruments, as well as unforeseen changes in investment conditions.
That, in general, is all.
About the sources of risk
Analysis of investment risks begins with this. Conventionally, they can be divided into:
- Systematic (non-diversifiable, market) risk. It occurs in everyone who conducts investment activities. Its probability depends on the stage of the economic cycle, the level of effective demand, changes in tax legislation and other factors that cannot be influenced.
- Unsystematic (diversifiable, specific) risk. Its feature is that it is characteristic exclusively for a specific object (or investor). For example, it may be associated with increased competition in a selected market segment; professionalism of management personnel; irrational capital structure and so on. It can be prevented by choosing the optimal investment portfolio, project diversification , and effective management.
Minimization
As you can see, there are a lot of potential problems. But is it possible to ensure their elimination? Unfortunately no. But the reduction of investment risks can be implemented. What contributes to this? Effective management, qualified personnel and insurance will minimize risks to the maximum. And if the first two points largely depend on the approach to the organization and on the qualities of the investor himself, then the third should be paid more attention. Indeed, in the modern world it is difficult to imagine investment risk management without insurance. But this approach has a negative side - the price. If we talk about transactions and investments, the amount of insurance payment will range from 1% to 9%. A more accurate value depends on the conditions of investment risks. For example, if investments are planned in a country to which there are no claims in terms of compliance with private property, the independence of the judiciary, etc., then the rate will be low. In case of sad circumstances, it will grow, and it is possible that insurance will not be carried out at all. In general, various methods of assessing investment risks are applied, which allow creating a more accurate picture. After all, the task of insurance companies is to make money on potential danger, and not to compensate for someone's losses. If we talk about countries, the approach is practiced when the level of investment risk is formed for each. This is considered an initial assessment. It can affect, for example, the maximum insurance amount of investments. Then selected individual conditions for a particular situation.
Conclusion
Here, in general, is the whole theoretical minimum about investment risks. Although the article turned out to be quite large, one could tell more! And the assessment of investment risks, and specific examples of their impact on organizational structures in certain conditions, and much more. By the way, a few words about management. As is already known, nine types of risks stand out (even if such a separation is very conditional). If we are talking about a small investment in a small business, then there may well be enough experience and evaluate, as they say, the situation by eye. But if significant investments are discussed, and even in foreign business, then a very detailed study of opportunities and risks will not be out of place. Moreover, it is desirable to attract a specialist. And it is very necessary that he specializes in risk management in a particular country, in which investments are planned. Indeed, even if he is a skilled worker, ignorance of the whole background can play a cruel joke, which will result in financial losses.