Chapter 2: Bhinn Bhinn Risk!

Yesterday we spoke about what is ‘risk’, today let’s discuss the realm of finance, where there are several types of risks that individuals, businesses, and investors may encounter.

Here are some common types of risks:

Market Risk: It is the possibility of your investments being affected by broader market factors beyond your control.

For example, if you own a food truck business relying on summer ice cream sales, a prolonged heatwave that keeps people indoors can lower your sales and cause financial losses. Similarly, in financial markets, market risk stems from events like economic downturns or changes in interest rates, impacting the value of your investments.

Credit Risk: It is the possibility of not getting repaid when you lend money.

For instance, if you lend money to a friend for their business and they struggle financially, there is a credit risk that they won't be able to repay the loan. Similarly, in finance, banks and other lenders assess credit risk to determine the likelihood of borrowers defaulting on their payments, which can result in financial losses for the lender.

Liquidity Risk: It refers to the chance of not being able to quickly sell or convert an asset into cash without significant losses.

For example, if you invest in a rare collectible item but struggle to find a buyer when you need cash urgently, you face liquidity risk.

Let’s meet tomorrow, to explore some more commonly known “Risk”