All investments carry some risk and it is always possible to lose money when you invest in any securities product. Apply the same principles when making any investment— understand what you are purchasing and how much it will cost you. Below are some of the risk considerations in making investments.
Your investment’s principal value may fluctuate from day to day depending on a variety of factors. Global events, events in the United States, or just a change in market psychology can affect how your investments perform. Fluctuations in investment values may be short-term and not indicative of long-term performance.
The value of any company’s stock is affected by current expectations for how that company or other similar companies may perform, independent of market risk.
Interest Rate Risk
Bonds fluctuate depending on movements in interest rates. Generally, short-term bonds are less impacted by interest rate movements than long-term investments. Bond values tend to move inversely to interest rates (i.e., when interest rates go up, bond values go down).
Common to bonds, the lower the creditworthiness of your investment, the higher its yield and risk in comparison to investments with a higher credit rating.
Risk involved when some securities are not readily available to convert to cash.
Certain investments in foreign securities, or in securities that invest in foreign investments, can be subject to fluctuations due to the value of the dollar compared to the currency of other nations.
Some securities are prone to greater risk factors. Typically, low priced securities, newly issued securities, low-rated or unrated fixed income securities and securities for which there is no ready market and cannot be readily sold (such as limited partnerships) are considered more speculative in nature than the securities of more mature, seasoned companies. Securities are available with all levels of risk and potential reward.
Occasionally, you as an investor may use "margin" to purchase securities. This means that you open a margin account and borrow the funds from your broker-dealer to pay for all or part of an investment. Margin accounts are not appropriate for all investors. When using margin, the client agrees to allow our firm to use the securities in the account as collateral for repayment of the loan amount and agrees to a specific interest rate for the loan. If the securities decline in value, so does the collateral supporting the loan, and the client must either add additional funds to the account or our firm may have to sell some of the securities in the account to maintain the equity in the account that is required by law or by our firm’s in-house requirements. We can choose which securities in the account to sell. The client is responsible for any shortfall in the account after such a sale. We will usually contact a client before selling securities in the account to meet margin requirements, but are not required to do so.
Therefore, the use of margin in an account can increase the impact on the client of a decline in the value of the client’s securities. Before entering into any margin agreement, you should thoroughly discuss all of the risks and requirements with your financial professional.
Risk Tolerance and Diversification
Every investment you make can be affected by one or more of the risks noted above. There is no escaping the fact that you always face a degree of risk when you invest. For that reason, it’s important to consider your risk tolerance, investment timelines and goals before making an investment decision.
Diversification is a basic principle of investing that helps balance potential returns against risk. Rather than putting all of your assets in one type of investment, you can diversify among several different types of investments with different characteristics.
Another way to reduce risk is to take a long-term approach to investing. This gives you the opportunity to ride out market fluctuations and realize market returns over a period of time. Your financial professional can help you determine your risk tolerance, timeline and goals and work with you to develop a personal investment plan that makes the most sense for you.