What is risk?
Risk in investing means that what you expect may not happen. The return may be lower, it may be zero, or you may lose part or all of the money you put in. No investment is completely free of risk; the difference is which kind of risk, and how much.
Knowing the risks helps in two ways. First, you know in advance what can go wrong with an investment, so you are not caught by surprise. Second, you can see which risk is hiding behind a promise of a higher return.
Say Rahim and Karim each set aside Tk 1,00,000. Rahim keeps it as cash in his cupboard; Karim buys shares in one company. Rahim’s money will never shrink in number, but inflation will eat into its buying power every year. Karim’s shares may go up or down. Both are taking a risk, just a different kind. The numbers are only an example.
Why it matters to an investor
- To understand what “safe” really means: low on one risk is not low on all risks. Something whose price cannot fall may carry more inflation or liquidity risk.
- To test promises of high returns: in general, higher returns come with higher risk. Hearing of unusually high returns with “no risk” is a warning sign.
- To match risk with time: some risks hurt most over short periods (price swings), others over long periods (inflation).
- To use diversification well: knowing which risks can be reduced and which cannot is what makes spreading your money meaningful.
Price and market risks
- Market risk: when the whole market falls, even good companies’ shares usually fall too. It happens when the economy, interest rates or investor mood change.
- Inflation risk: if your return is below inflation, your buying power falls even as the amount grows. For cash, savings accounts and low-interest deposits this is the biggest risk.
- Interest-rate risk: when rates rise, the market price of bonds bought earlier falls, because new bonds pay more. Share markets often come under pressure when rates rise, too.
- Currency risk: when the taka weakens, costs in foreign currency (studying abroad, imports) rise; assets held in foreign currency move the other way in taka terms.
Who holds your money, and how
- Credit or default risk: whoever you lend to (the institution for a deposit, the issuer for a bond) may fail to pay the interest or principal on time.
- Liquidity risk: not being able to sell quickly at a fair price when you need to. It is higher for land, flats, thinly traded shares and schemes that penalise early withdrawal.
- Concentration risk: with all your money in one place, one company or one sector, a single piece of bad news hits all your savings.
- Fraud and regulatory risk: losing money to unlicensed schemes or apps, or returns changing because the rules change (tax, limits, trading rules).
Two real lessons from Bangladesh
Market risk: on 19 December 2010 the Dhaka Stock Exchange general index (DGEN) fell about 6.72% in a single day, its steepest one-day fall up to then. The market fell a good deal further over the following months. Falls like this hurt most those who buy shares with borrowed money or with all their savings.
Liquidity risk: to stop share prices falling too far, the BSEC brought in “floor prices” (a lower price limit) from 28 July 2022. Prices on paper stopped falling, but with no buyers at those prices, many shares could not be sold for months. In January 2024 the floor was lifted for all but 35 companies. The lesson: a price that does not fall is not the same as being able to get your money out.
Common mistakes
- Thinking only price swings count as risk, and forgetting inflation and liquidity risk.
- Hearing “guaranteed high profit” and assuming there is no risk, without asking which risk pays for the higher return.
- Putting money needed soon into something whose price swings or that is hard to sell.
- Investing with borrowed money, which makes any loss bigger when prices fall.
Before every investment, ask: what could go wrong here, and what happens to me if it does?