Investment Risk Information

Here at Wealthface, we understand the importance of transparency and risk assessment. In these pages, you’ll find a full summary of the risks associated with investing. Please keep in mind that this is not an exhaustive list, but rather an outline of the factors which might affect your investments’ value.

Equity Risk

Here at Wealthface, we understand the importance of transparency and risk assessment. In these pages, you’ll find a full summary of the risks associated with investing. Please keep in mind that this is not an exhaustive list, but rather an outline of the factors which might affect your investments’ value.

Inflation Risk

Inflation risk are the risks involving the decline of the purchasing power possessed by any savings, as a result of prices rising across the board.

Credit Risk

A fixed income security is a promise to pay interest and repay a specific sum at a later date. Credit risk, therefore, is the possibility that the promise made may not be honored. Credit ratings agencies provide investors with a suggestion of the credit risk level represented by an issuer. Companies with high credit ratings represent a lower risk, whereas low credit ratings imply a greater credit risk, which should be kept in mind.

Short Selling Risk

Investors looking to take advantage of volatility management are often interested in strategies based on short selling. Volatile or declining markets often present these kinds of strategies, but short selling securities do involve certain risks, as assurance of sufficient decline in value in the period which the short selling takes place is lacking. As a result, there is no guarantee that the interest paid by the investor can be realistically offset in order for profits to be made. Short sold securities can then increase in value, and what’s more, the investor may find it difficult to repurchase and return the borrowed securities. The borrowing agencies (from whom the securities have been borrowed) may also find themselves bankrupt, leading to investors losing collateral unexpectedly.

Foreign Currencies Risks

Investing in securities priced in foreign currencies involves, by its very nature, a foreign currency risk. These securities can lose their value when the currency of your country of residence rises against the foreign currency. What’s more, foreign governments sometimes impose currency exchange restrictions, which can limit one’s ability to buy and sell some foreign investments. This can lead to a reduction in value of foreign securities being held by investors overseas.

Foreign Markets Risks

Foreign investments sometimes involve further risks, which arise from a number of different situations. The most common risks come about as a result of financial markets in other countries being less liquid, and also as a result of foreign companies perhaps being less regulated, and subject to lower standards of accounting and financial reporting. In some countries, a workable legal system relating to the stock market may be severely lacking. Overseas investments are also affected by social, political, or economic instability, and they can also be subject to restrictions imposed by the government of the country.

Liquidity Risk

Liquidity refers to the speed and ease at which assets can be dealt with, sold, and made into cash. Most securities can be sold swiftly, and at a reasonable price. However, volatility in the market can lead to a drop in liquidity, meaning it isn’t so simple to sell quickly and without complications. Some securities become illiquid as a result of legal restrictions, or the very nature of the investment in question. Difficulties in selling securities can result in a smaller return, or even a loss.

Borrowing Risk

It’s a fact that not all investors are suited to the use of leverage. Using money that has been borrowed to finance the purchase of securities involves a high level of risk than purchases made with cash only. Should investors borrow money to purchase securities, the investor has a responsibility to repay the loan – as well as pay the necessary interest – even if the securities decline in value.

Derivatives Risk

Derivatives are investments whose value is derived from how other investments perform, or as a result of moving interest rates, exchange rates, or market indices. The advisor may recommend derivatives to assist in the offset of losses that other portfolio investments may suffer, due to changes in stock prices, interest or exchange rates, or commodity prices. This process is called ‘hedging’.

Common risks associated with investing in derivatives and hedging include:

  • A lack of guarantee that the derivative will be bought or sold at the optimal moment to make profit, or indeed avoid a loss being suffered. Alongside this, there’s no guarantee that the other party will honor their contract obligations. Should the other party become bankrupted, the deposits or pledged assets of the investor may be lost.
  • Hedging strategies are not guaranteed to consistently work, due to certain elements determining the value of the derivative being subject to changes which may go against the hedge’s intent.
  • Hedging may not necessarily offset a drop in a security’s value, and hedging can even prevent portfolios from making gains which would have occurred were no action taken at all.
  • It might be impossible to create an effective hedge against an anticipated market change, due to the fact that most other investors will also be expecting the same change.

Exchange Traded Funds Risk

Exchange-traded funds (“ETFs”) are securities that can be bought and sold just like common stocks:

  • An ETF may not effectively or successfully track the market index or segment that underpins the investment’s objectives.
  • ETFs may not be managed actively. Any ETFs which come under this category would not necessarily sell a security, due primarily to the fact that the security’s issuer may have experienced some financial trouble. As a result, the ETF performance may end up being worse than the performance of a similar ETF managed in a different way.
  • Some ETFs employ leverage, which may end up increasing the risk of a market segment or particular index.
  • The market price of a certain ETF unit may trade at a reduced or discounted value to the value of its net asset.
  • An ETF unit’s active trading market may not develop and may not be maintained.
  • A lack of guarantees that the requirements of the necessary exchange for maintaining the listing of an ETF will be continually or successfully met.
Close Menu