New investors should be cautious: Clearly understand the risks involved in investing before taking action

For beginners in the investment industry, the first question to ask yourself is “What types of investment risks are there?” and “What level of risk am I willing to accept?” Although these may seem like basic questions, they are the foundation of prudent investment decision-making. Understanding various threats will help you better protect your capital.

Basic Investment Risks You Need to Know

When it comes to investment risk, we need to distinguish which types of risks most impact your portfolio. Here are the most common types found in the market:

Market Risk

General market factors are the primary source of volatility, which can be divided into:

• Stock Price Volatility: Economic conditions, market sentiment, and company performance influence price movements, which can rapidly decrease or increase value.
• Interest Rate Risk: Debt instruments like bonds have an inverse relationship with interest rates. When rates rise, bond prices tend to fall.
• Exchange Rate Risk: Investing in foreign currencies exposes you to exchange rate fluctuations, which can overshadow expected returns.
• Commodity Price Risk: Oil, precious metals, and agricultural products depend on supply-demand, geopolitical events, and weather conditions.

Liquidity Risk

Difficulty converting investments into cash quickly reflects “liquidity risk.” Assets like real estate or specific bonds may have few buyers, forcing sales at below-market prices. This risk is important because it affects the ease and timing of buying and selling.

Concentration Risk

When one asset class or sector dominates a large portion of your portfolio, risk increases exponentially. If that asset faces problems, the impact on your entire capital can be severe. Diversification across various assets, sectors, and regions is the main way to mitigate this.

Default Risk

Issuers of debt, such as companies or governments, may fail to pay principal or interest on time. Government bonds in local currency (like USD or THB) are generally low risk due to the taxing power of the state, but corporate bonds’ risk varies with the issuer’s financial health. Credit rating agencies help assess these risks.

Reinvestment Risk

When interest or principal matures, you may not be able to reinvest at the same rate. For example, if an old bond yields 5% but current market rates are 3%, capital loss is unavoidable.

Inflation Risk

Inflation is a silent demon eroding the value of fixed-rate debt instruments. The longer the maturity of bonds or deposits, the greater this risk.

Timeline Change Risk

Life is unpredictable. Impulsive decisions, emergencies, or changes in financial goals may force you to sell investments earlier than planned, possibly during unfavorable market conditions.

Longevity Risk

Post-retirement self-maintenance requires sufficient funds. If your lifespan exceeds expectations, this risk becomes significant.

International Investment Risk

Investing in foreign markets adds complexity, including exchange rate volatility, political instability, and economic cycles different from your home country.

High-Risk Investments: What to Watch Out For

Cryptocurrencies

These assets are characterized by extreme volatility and unpredictable price swings. Bitcoin is a prime example, with prices capable of rising or falling sharply within hours. Volatility stems from market sentiment, news, and economic announcements.

CFDs (Contracts for Difference)

This derivative product allows speculation on price changes without owning the underlying asset. While CFDs can generate substantial profits, they also carry risks such as:

• Using margin trading, which means leverage can amplify both gains and losses.
• Counterparty risk, since CFDs are OTC contracts. If the provider collapses, you may lose your entire investment.

( Options and Futures

Both derivatives feature high leverage and rapid price changes, making them risky for beginners, especially during volatile periods.

) Forex Trading

The foreign exchange market is large and liquid but also highly volatile. Most forex trading uses margin, allowing traders to control large positions with small amounts of capital. The problem is that leverage can lead to equally large profits or losses.

Suitable Investments for Beginners

Government Bonds

This is the safest investment for beginners, backed by the state’s power. Savings bonds pay interest quarterly until maturity. They also serve as a safe haven during market turmoil.

Money Market Funds

This option is suitable for those seeking higher returns than savings accounts but are not ready for high risk. It is also ideal for those who want liquidity for their funds.

Blue-Chip Stocks

Shares of large, reputable companies with stable profits and regular dividends, such as Apple, Microsoft, and Johnson & Johnson. They tend to be less volatile than small or speculative companies.

Strategies to Minimize Risks

Avoid aggressive investments when still a beginner

If you do not understand the market well, investing in high-risk assets is risky for risk’s sake. Choose assets you understand and that suit your profile.

Limit the amount of money invested

Although many investment opportunities exist, investing all your funds may be beyond your capacity. Analyze risks and select only those manageable and important.

Transfer risk to other assets

If you believe your current investments are not worthwhile or take too much time, switching or selling out is a reasonable solution.

Study investment patterns thoroughly before deciding

There are many free and paid resources online. Spending time on systematic education is a good investment, as it helps reduce risks caused by poorly informed decisions.

Summary

Investment risk comes in many forms and levels of severity. Assets like cryptocurrencies, CFDs, futures, and forex have the potential to generate significant returns but also carry high risks. Conversely, bonds, blue-chip stocks, and money market funds are suitable for beginners. Before starting your investment journey, clearly define your goals, risk tolerance, and time horizon. Risk management is key to success in investing.