Understanding Your Exposure to Stock Market Risk Through Your Investments

The financial risks of investments are an incredibly important issue in the economic sphere, requiring close study and great attention before investing in any project. What is the essence of financial risks in the investment process? What are the types of risks? What are the methods for assessing investment risks? These are the topics we will be talking about in this article. If you’re ready, then go ahead!

Risks of financial investments: concept

Investment risks – options in which the invested funds in the project development due to certain actions and processes may be partially or completely lost. Any investment, by its very nature, has the potential to be lost.

However, financially savvy investors understand that capital growth is impossible without investments. After all, even the funds saved “for later” are not protected from the harmful effects of various types of inflation. In every possible way, the financial and economic crisis put spokes on the wheels of promising investors.

Even exceptional literacy in the theoretical understanding of investment risks will not help to protect money reliably. To increase the likelihood of investment success, it is important to take some practical steps.

First of all, the investor is faced with the task of carefully analyzing portfolio investments. This step will help you think about your actions smoothly and identify the risks of investments. To competently carry out the measure in question, you must evaluate your assets correctly.

How investment risks are assessed

Certain methods assess investment risks. Main methods:

  • Expert process: can be safely considered as a basis for assessing investment risks and making decisions. To implement it, you need to involve an expert who has nothing to do with your company or project. He, based on the data obtained after studying all the materials, provides his expert assessment by calculating the potential levels of risks.
  • Delphi method: is a kind of expert method. Its essence lies in the simultaneous involvement of several experts to evaluate investments. Based on a comparison of their findings, a concept is developed for further actions regarding investment in the development of the project.
  • Method of analysis: the process under consideration evaluates the feasibility of costs, identifying the most “promising” areas of risk occurrence. This procedure can be carried out by both the investor himself and the involved expert.
  • Analogy method: the essence of the ways is to evaluate and analyze investment projects that are related to or similar to your project.
  • Quantitative assessment method: according to experts, this risk assessment method is the most complex and costly. It contains several analytics tools, which ultimately allow you to obtain qualitative and quantitative estimates in numerical terms for the final decision.

There are such tools for risk analytics:

  • Analysis of possible scenarios for the development of the project.
  • Calculation of the sensitivity of the project.
  • Determination of startup stability levels.
  • Development of risk models, according to the Monte Carlo methodology.

To minimize the possibility of obtaining distorted results, experts advise using different types of assessment in practice, taking into account all the indicators obtained. This is the only way to hope for reasonable adequacy of the data obtained.

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