The risks of investing
As you may know, investing in financial instruments involves risk. The valuation of financial instruments may fluctuate, and as a result, investors may lose (part of) their entire investment. Therefore only invest with money you do not immediately need. If you decide to invest, it is important to be well prepared and only trade in financial instruments you fully understand. Before you start investing, you should consider your investment objectives, your expectations and the possible outcomes.
Please see an overview below of the most common risks of investing. Please note, however, that risks of specific financial instruments are not included in this overview.
Market risk is the risk that the value of your investments might decrease because of micro- or macroeconomic developments. For example, declining economic growth can cause the value of a company to go down, which in turn will render shares in the company less valuable. You can partly reduce this risk by having a well-diversified portfolio.
Interest rate risk
Interest rate risk is the risk that the value of investments might decrease when market interest rates rise. Rising interest rates may reduce consumer spending and increase interest costs for companies. This can put pressure on company profit. A rise in interest rates can, therefore, negatively affect the value of shares, bonds, and investment funds that hold shares and bonds.
Credit risk is the risk that the company or country in which you have invested is unable to meet its financial obligations. For example, a company can no longer pay its interest or can default on a loan. This could lead to worthless investments.
Liquidity risk is the risk that your investments cannot or can barely be traded on an exchange. In that case, your investments are not liquid or illiquid. This means that you (temporarily) cannot close your investments when you want to; you cannot freely divest your positions, or you get a worse price for your investments when you close them.
Currency risk arises when you invest in a currency other than the euro. If the exchange rate of that other currency drops in relation to the euro, it has a negative impact on the value of your investments in that other currency.