Market Risk: There is always a chance that your investment will not actually increase in value, meaning you lose money in the long term. This is the most common risk for investments in company stocks, but it is also a risk when investing in goods. For example, cars, electronics, motorcycles, collectibles, and home furnishings and appliances are all costly “investments,” but they also quickly decrease in value with use. As a result, they are not smart financial investments. If you happen to have a classic or limited-production car, it may actually increase in value. For the average consumer, though, a wiser product investment is real estate because it typically (not always!) increases in value over time.
Financial/Business Risk: If you want to take a risk by investing your money in a private business, you could end up gaining a lot in the long run. However, when people invest in a business, they also risk losing some or all of their money if the business declines or goes bankrupt. To manage this risk, some people choose to invest in government stocks. These stocks are significantly more secure but also have a lower return rate, or the rate at which the funds increase. Ultimately, each investor must decide how much risk he or she is willing to take.
Inflation Risk: When investing money in any manner, there is always a risk that the rate of return is not as high as the rate of inflation. You’ve probably heard that a dollar today buys a lot less than it did, say, 50 years ago. This difference is due to inflation, or the decreasing value of currency. If invested funds are increasing at a rate that is slower than the rate of inflation, technically, you are losing money because you are not earning enough money to account for the natural devaluing of the money you invested. This is why keeping your savings in a jar or safe is not a secure investment. To manage this risk, seek out savings plans that account for inflation.
Fraud Risk: Any time you invest your money, it is important to research thoroughly the product, stock, company, etc. in which you plan to invest. Fraudulent organizations or people occasionally trick investors into giving them money and then disappear with the funds or spend it all frivolously. Wise investors can reduce the risk of fraud by doing plenty of research before investing and by diversifying their investment portfolios. Don’t worry: Although fraud is illegal, accidentally becoming a victim of fraud won’t land you in handcuffs—though you may lose a lot of money.
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