Term: Risk

Stock-specific risk

This is the risk that there might be a reduction in the expected return as a result of some event or circumstance specific to a company, e.g. the fortunes of Glaxo in the ‘80s and ‘90s were linked to the success of drugs such as Zantac. 
 
Market risk

The risk that there might be a reduction in expected return as a result of a fall in the stock market generally, e.g. virtually all shares on the Stock Exchange fell in the great bear market of 1973 - 74 and, to a lesser extent, in the crash of 1987 and the bear market of 2000 - 03.

Currency risk

Where investment is overseas sterling may appreciate against the investing currency. During 2004 sterling rose against the US dollar, almost completely eliminating the capital growth from investments in US equities.
 
Geographic risk

A major ‘Act of God’ can have a disastrous affect on the performance of a country’s businesses or an industry. Economic losses from natural disasters were greater in the 1990s than in the previous four decades combined. In 1998 alone storms, floods, droughts and fires caused almost $100 billion in economic losses1, equivalent to the entire GDP of New Zealand2!

1. Source: http://www.worldwatch.org/press/news/1998/11/27
2. Source: http://www.cia.gov/cia/publications/factbook/rankorder/2001rank.html
 
Political risk

A change to a government with different fiscal and monetary objectives: this may be as a result of the democratic process or it may occur through coup or revolution. For example, part of the UK market’s decline in 1973 - 74 was attributed to the election of a Labour government that was perceived in some quarters as left-wing. The political risk of investing in China is far greater than investing in the UK as the
Chinese economy is subject to the unpredictable whims of the Chinese government.
 
Interest Rate Risk

Rate rises lead to falls in fixed interest securities values and returns from variable rate cash accounts.

Re-investment Risk

When income received during the life of the investment cannot be re-invested at the predicted rate.

Business Risk

The management of a company makes poor business decisions or a whole industry may go into decline.

Default Risk

When the issuer of a bond fails to pay the interest or repay the capital.

Inflation Risk

The real value of the investment and the income from it falls because of inflation.

Liquidity Risk

The investment may be difficult to sell or encash.

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