The risks of investing

If a company you invest in performs well and demand for its shares increases, the value of your investment will usually rise. However, if the company's performance declines, the shares you hold may lose value or possibly even become worthless. In other words, buying shares in a company means committing to share in both the profits and the losses.

Always remember that all investments carry a certain amount of risk, which can lead to a total loss.

Below you can learn more about six different types of risk that you should consider when investing.

Market risk, also known as systematic risk, describes the potential losses that an investor may suffer due to general market movements. It is influenced by various factors, including economic indicators (e.g. gross domestic product, unemployment rates), monetary policy (e.g. interest rate changes by central banks), geopolitical events (e.g. war, political instability) and regulatory changes (e.g. legislative changes, new regulations). In contrast to specific risks that only affect individual companies or sectors (such as the risk of corporate insolvency), market risk affects all investments in a market. If the market as a whole falls, the value of most or all investments generally falls.

Sentiment also plays a role in market risk. If general confidence in the market falls, your investments are also likely to fall in value. Overall, market risk is an unavoidable part of investing.

Price risk refers to the risk that the value of your investment will fall due to price fluctuations on the market. This can lead to losses. Spreading your investments can partially reduce this risk.

Interest rate risk describes the fact that the value of fixed-interest investments, such as bonds, changes due to changes in interest rates. When interest rates rise, bond prices typically fall. The longer the term of a bond, the greater the interest rate risk, as the effects of interest rate changes are more noticeable over a longer period of time. In addition, interest rate risk can also have indirect effects on other asset classes, such as equities, as rising interest rates can make borrowing more expensive for companies and thus affect their profits.

Credit risk refers to the risk that a borrower - be it a company, a state or another institution - is unable to fulfil its payment obligations. This can result in bondholders not receiving interest or, in the worst case, losing their investment entirely if the borrower becomes insolvent. Credit risk is particularly relevant for bonds, as investors are dependent on the ability of the borrower (so-called issuer/issuer of the bond) to make the agreed payments.

Market liquidity risk describes the risk that an investor cannot sell his investments quickly enough or only at an unfavourable price if he wishes to do so.

This risk often occurs when there are few buyers for a particular security, which can lead to a fall in price when the investor tries to sell it. Typical indicators of this are large differences between buy and sell prices (known as spreads) or very low trading volumes.

You are exposed to this risk if you invest in a currency that is not your home currency. The performance of your investment will be affected by fluctuations in exchange rates between different currencies. If you invest in a foreign currency and this currency loses value compared to your home currency, the actual return on the investment may fall.