The three distinct risks are business risk, valuation risk and the force of sale risk on investment which you purchased like stock, bond, mutual fund etc. If you can understand or discover the risks then you could protect yourself from financial failure.
Among the three kinds, business risk is more common and easily captured by anyone. It is very much easy not to get the proper value of money because of competition, mismanagement and financial insolvency.
There are lots of business industries like airlines, railroad, steel etc, which are really taking higher level of business risk. A franchise’s value is the biggest defence against business risk. In the world of investment, a franchise’s value always helps the customer to choose the popular brand or product. There are many companies that are very much user-friendly with franchise values to raise the price for taxes or material costs.
The stocks and bonds to commodity type business industries are likely to earn more from their business than other industries. Luxury and normal decline significantly is not for commodity type business when economic environment goes to south.
In the world, every person is not concerned about business risk, but they are very much concerned about valuation risk because when the purchase of stock touches sky high prices, the absolute curtain is the future growth, which will increase their earning. There are a number of new markets or brands and their margins are excellent. Their growth is stellar, no debt in their balance sheet. Business is so far from its current and average earning.
In the stock market, people can be comparatively confident about what will happen but don’t know when will happen. At that time, they twist their basic advantages into disadvantages. When someone purchases some reputed brand’s shares and sells the stock sometime later in the year, it has been devastated by crash. May be the analyses have been correct but the limitation of the timing is incorrect. For that, they have opened them up because of tremendous amount of risk.
Being forced for sale is really a liquid risk. Everyone should be careful about this because it will threaten the financial well-being unless you protect it. In simple terms, liquidity risk refers to the risk on an active buyer or seller when anyone wants to buy or sell it. It means the investors are holding the investment at a time when the investors need cash.
There have always been some levels in every investment in which investors purchase. At the same time, they have to avoid or minimize specific types of risks, which really help from temporary hiccups of economy or financial market from destroying investor health.