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Starting a journey in the financial market poses significant challenges, particularly in navigating investment risks and determining the appropriate strategy for achieving positive returns. The initial steps may seem daunting, leaving many uncertain about where to begin.
There is no such thing as a completely risk-free investment. Certain investments may carry more risk than others, depending on the expected return.
It is crucial to be aware of the risks involved in making decisions in our daily lives and in financial markets. It is important to understand these risks and develop effective strategies to reduce them as much as possible.
We will provide an introduction to investment risks and how to assess them before applying.
What do investment risks entail and how are they typically described?
Every investment seeks to make a profit, with risk related to the unpredictability of achieving this.
There is always a possibility of receiving returns lower than anticipated in any investment, despite aiming for profits. Losses can exceed the initial investment amount.
Systemic risks encompass the entire economy and can affect the financial market as a whole, while non-systemic risks are specific to each type of investment.
Investment risks include market risk, systemic risk, liquidity risk, credit risk, and management risk.
Market risk refers to the possibility of financial losses due to changes in market conditions.
Market risk is linked to the changes in the financial market, whereby a higher level of fluctuation corresponds to a higher level of risk. It is widely recognized among investors as it significantly impacts investments.
The level of risk is tied to the potential for profit and will correspond to the anticipated return, making it crucial to consider the fluctuation of the investment.
Diversifying investments can help reduce risk and protect capital by taking advantage of assets that may not be correlated.
Liquidity risk
Liquidity refers to how easily an investment can be converted into cash, with some financial assets having high liquidity and others having lower liquidity.
Real estate is considered a low liquidity investment as it can take several months to sell a property, making it unsuitable for investors looking for quick capital returns.
In highly liquid investments, it is possible to withdraw the invested capital before the maturity of the investment, such as with savings accounts and conservative investment funds.
The higher the risk, the higher the potential return, as liquidity and return are closely linked.
Credit risk refers to the likelihood of a borrower failing to repay a loan or meet their financial obligations.
Credit risk refers to the chance of a financial transaction resulting in a default, which means the investor may not receive the expected payment from the debtor.
It is important to stay cautious to prevent unexpected occurrences by thoroughly researching the institution you are investing in.
Management or operational risk potential
The management risk is commonly described as potential internal process failures or the investment manager’s capability to achieve the anticipated profit.
In investment situations where a third party is handling the capital, there is a common risk of the manager’s decisions and strategies being ineffective and failing to produce the desired outcome.
Investor’s profile
Before deciding where to invest, investors need to take into account the risk, potential returns, and liquidity of the investment, as these factors determine the investment’s risk profile.
Each investor profile determines the amount one is willing to risk for potential profit, which can be a key factor in achieving success with investments. Let’s explore each profile further.
Traditional
The Conservative investor values security and tends to choose low-risk investments that preserve their heritage. They are interested in low-altitude investments, daily liquidity, and fixed income.
People over the age of 40 who want to preserve their accomplishments or new investors who are still unsure about the market typically fall into this category.
Investments associated with this profile include Direct Treasury, CDB, LCI/LCA, and Fixed Income Funds.
Moderate
This investor profile is midway between seeking security and being more willing to take on long-term risks.
It is known for being a versatile profile that allows you to maximize investments effectively, whether focusing on security or aiming for high returns.
Investors with a good understanding of the market and a growing wealth are typically considered for this type of investment. Examples of suitable options for this type of investor include the stock exchange, CDI, and CDB.
Bold or assertive
The bold profile contrasts with the conservative profile. This investor thinks that embracing all risks is the most effective approach to earning profits, even if it results in short-term losses.
The aggressive investor doesn’t invest randomly; they have clear strategies and extensive knowledge of the financial market, accepting short-term losses for long-term gains.
It focuses on short-term returns and invests in high-profit company stocks, requiring both technical and emotional preparation to handle market fluctuations and risks.
It is important for individuals with this profile to have savings set aside for emergencies. This way, they can use this money in unexpected situations instead of cashing out investments and losing potential profits.
What type of investment best suits my profile?
Knowing your investor profile is crucial, although it’s important to note that this categorization is not entirely conclusive.
The more you comprehend the financial market and apply that knowledge, the better you can develop your strategies and align yourself with your objectives.
You might begin with a cautious approach and gradually transition to a more moderate or daring approach based on your time horizon and risk tolerance in pursuit of higher returns.
Investments with varying levels of risk
Each investor’s preferred method of investing is determined by their investor profile, with the desired profitability influencing the level of risk they are willing to undertake.
Low level of risk
If you have a conservative profile and prefer safe investments, fixed income may be a suitable choice. Explore some illustrative options.
Savings are funds set aside for future use.
Investing in savings is considered one of the most secure investment options at present and is widely recognized by Brazilians. It involves setting aside a portion of one’s income for future expenses.
While considered secure, savings accounts do not provide high returns, with current rates around 2.1% annually.
CDB
CDB, also known as a Bank Deposit Certificate, is a popular type of fixed income investment in Brazil.
Banks and brokers provide an investment app for raising funds, offering both fixed and variable interest rates, similar to borrowing money from a bank and receiving interest payments.
It is viewed as a secure investment due to being safeguarded by the FGC (Credit Guarantee Fund), which protects investments of up to R$250 thousand per individual in the event of insolvency or bankruptcy.
Treasury Selic bonds are mentioned in the text.
The Selic Treasury operates similarly to a CDB, where you lend money to the government and earn interest in return, making it one of the safest investments due to its government backing and lower default risk.
The Selic Treasury offers easy access to funds and can be quickly cashed in. Earnings are tied to the Selic rate, which is higher than that of savings accounts.
Increased chance of danger
For those who have a more aggressive investment profile, variable-income investments can yield higher profits. These investments carry high risk due to their volatility, but it is this instability that offers the potential for greater returns.
Actions ready to be taken
Investing in stocks is essentially becoming a business partner, sharing in both the risks and rewards of the company.
Options trading market
Investors can utilize options to purchase or sell assets in the future at a set price, enabling the implementation of various strategies in varying market conditions.
Currency Exchange – Money conversion
The exchange process involves trading one currency for another, with risks stemming from potential unexpected losses due to fluctuations in exchange rates.
What are the risks associated with the collective investment market?
Collective investments, a recent development in Brazil, involve a group of individuals investing in a company’s project. They receive the invested amount back, along with agreed-upon interest, at a predetermined time. This option has proven to be profitable for investors and gained significant popularity.
What are the risks associated with investing in collective investments?
One could argue that fixed returns offer a level of predictability to investors as they know in advance when and how much profit they will make. The main risk in this scenario is credit risk, which arises if the issuing company faces financial difficulties and is unable to repay investors at the agreed upon time.
Serious companies like INCO conduct thorough credit evaluations on the businesses they work with for pickups to ensure they are reliable and financially stable. Various guarantees, such as the entrepreneurs’ assets, are also part of this negotiation process to minimize risk.
Investors can feel more secure and invest more confidently with reduced risk in this method.
In conclusion
Did you gain a better understanding of investment risks and how they are identified?
While some investment options are more secure than others, all investments carry a level of risk, requiring us to regularly update our knowledge to reduce these risks.
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