Risks involved in Investments

Stocks and Bonds are two investment options where you can lose money as quickly as you earn it, if you are not well informed. It is important to be well aware of the risks posed by various investment options and be warned against making decisions in hast due to lack of knowledge. Hence there is a growing demand for sources of information like which dispels crucial information regarding investment basics and educates potential investors. Let’s take a look at the risks of come along with bonds and stocks.

Bonds can provide a means of preserving capital and earning a predictable return. Bond investments provide steady streams of income from interest payments prior to maturity.The interest from municipal bonds generally is exempt from federal income tax and also may be exempt from state and local taxes for residents in the states where the bond is issued.As with any investment, bonds have risks. We have made a list of all the possible risks involved.

Possible risks

Credit risk: The issuer may fail to timely make interest or principal payments and thus default on its bonds.

Interest rate risk: Interest rate changes can affect a bond’s value. If bonds are held to maturity the investor will receive the face value, plus interest. If sold before maturity, the bond may be worth more or less than the face value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.

Inflation risk: Inflation is a general upward movement in prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of interest.

Liquidity risk: This refers to the risk that investors won’t find a market for the bond, potentially preventing them from buying or selling when they want.

Call risk: The possibility that a bond issuer retires a bond before its maturity date, something an issuer might do if interest rates decline, much like a homeowner might refinance a mortgage to benefit from lower interest rates.

Stocks on the other hand present risks and opportunities of its own. Stocks offer investors the greatest potential for growth (capital appreciation) over the long haul. Investors willing to stick with stocks over long periods of time, say 15 years, generally have been rewarded with strong, positive returns.

But stock prices move down as well as up. There’s no guarantee that the company whose stock you hold will grow and do well, so you can lose money you invest in stocks. If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds. The company’s bondholders will be paid first, then holders of preferred stock. If you are a common stockholder, you get whatever is left, which may be nothing. To know more about stock prices and investment, feel free to visit