Causes of Risk

Business risk refers to a threat to the company’s ability to achieve its financial goals. In business, risk means that a company’s or an organization’s plans may not turn out as originally planned or that it may not meet its target or achieve its goals.

Such risks cannot always be blamed on the owner of the company, as risk can be influenced by various external factors, which may include rising prices of raw materials for production, growing competition, or changes or additions to existing government regulations.

Factors responsible for causing risks in investment

1. Demand and supply forces

In securities market, the role played by the demand and supply forces is very vital. When they cannot be properly predicted, then the security prices will show wide variations. Fluctuations in prices make the securities risky.

2. Maturity period

If investments have a longer maturity period, then they will invite more risks because of the duration of the investment.

3. Security

Investment may be secured or unsecured. If the investment is secured by collateral securities, then the risk will be less.

4. Unsatisfactory credit worthiness of the issuer

Generally, the securities of Government and semi-government bodies are having a high degree of credit worthiness. But securities issued by the companies in the private sector do not command much credit worthiness. In situations where the credit worthiness of the issuer is not satisfactory, risks are bound to arise.

5. Selection of the highly risky investment instruments

There is different nature of investments such as corporate shares or bonds, chit funds, Nidhis, Benefit funds, etc. These investments are considered to be highly risky as they relate to the unorganized sector. But some instruments like bank deposits, post office certificates like National saving certificates, Kisan Vikas Patras, etc, are less risky. Because these instruments ensure certainty of payment of interest and principal.

6. Incorrect decision taken with regard to investment

In investments, what to buy and sell are the main decisions to be made. The decision to buy or sell depends upon the estimation of the fair intrinsic value of the shares, over valuation or under valuation of the share and also a number of other factors. Any mistake committed while making an investment decision, therefore, causes considerable risk in investment.

7. Failure to judge the correct timing of investment

The most important factor in the investment programme is the timing of purchase or sale of securities. The prices of stock fluctuate with each stock having its own cycle of fluctuations. If the investor is able to forecast these price changes, he is in a position to make a higher profit.

In boom periods, the prices of stock rise and during depression they fall. An analysis of the price behavior of the individual scrip will help to locate the buy and sell points.

8. Amount of investment

Investing a huge amount in a particular security is quite risky. The higher the amount invested in any security, more will be the risk. On the other hand, judicious mix of investments in small quantities may be ideal.

9. Nature of Business

Selection of a risky industry for investment is only inviting the trouble. As any business is prone to ups and downs, its prosperity should not be taken for granted. Any unfavorable trend in the industry will affect the company also.

10. Terms of lending

Terms of lending such as periodicity of servicing, redemption periods, etc., are the factors which cause risk in the investment concerned.

11. National and international factors

In the days of sophisticated means of communication, even the changes taking place in foreign markets influence the markets of other parts of world. Similarly, changes in conditions within the country are quickly reflected in security prices. So, national and international factors cause risk in investment.