5. What are Risk Factors?

Any investment is open to risks. Investment managers try to classify these risks into different categories for better understanding. Some of these categories are:

Market risk
The price of a security may be affected because of the overall sentiment in the market. Sentiment means how most people in the market feel.

Economic Risk
The prices of securities may fluctuate because the expectation about the national economy, whether the economy as a whole is slowing or growing. It also means how an economy is doing compared to other competing economies.

Interest Rate Risk
Changes in interest rate (which occur due to change in supply and demand for money) influence security prices. In case of fixed income securities, the impact is direct. If interest rate rises, price falls and vice-a-versa. Fall in interest rates may benefit share prices because cost of funds to companies may move down, hence their profit may go up.

Credit Risk
The risk of failure on part of a borrower to meet interest and principal amount obligations.

Regulatory risk
Pries of securities may be affected due to changes in law, procedures, import export policy etc.

Industry risk
A particular industry may be affected due to certain developments peculiar to that industry.

Technology Risk
Discovery of new processes or radical change in technology used by certain companies may affect prices of shares of that company. This is also known as risk of obsolescence.

Environmental Risk
Certain companies may be adversely affected because of certain restrictions imposed on them by the authorities for protection of the environment.

Event Risk
Some times an event such as an accident or an earthquake may influence prices of securities because the event may cripple the operations of a company temporarily or permanently.

Country risk
A country in financial difficulty may impose restrictions on trade and capital flows affecting investments made in that country.

The above list is not exhaustive; only illustrative. Such categories of risk are often referred to as risk factors.