Capital Risk

The risk associated with any kind of investment where you are not sure if you will be able to get back all your money as there exists the risk of losing a part, or all of the principal money spent on the investment is called capital risk.

Such threats are limited to the duration the money is invested.

Whatever the vehicle, the prime motivation is to earn more cash in the future.   Before the 2008 crisis, very few people were worried about cash savings.

People trusted the financial systems but when the Northern Rock was bailed by the Bank of England in 2007, people started looking for higher protection as there are many different types of risks associated with putting money in investment vehicles (like stocks, mutual funds, bonds) like credit, business & market risk. 

Capital risk definition 

It is the primary risk related to any type of investment. It is not temporary price fluctuations; it is a permanent loss of the money, which can, otherwise, be known as investment risk or permanent loss of capital. 

The different types of inherent risks associated with such financial solutions are - 

• The stock price may drastically decline as the issuer of the bond defaults or the cash investments (U.S. Treasury bills or money market funds) lose ground to inflation. (One may not consider a decline in the price of stocks or bonds as a loss unless it is sold in the market.) 

• In stock markets, the investment that has a higher risk has the potential to generate higher returns (the risk-return tradeoffs).  The greater the level of risk one is willing to take, the higher is the potential reward. 

• The US Treasury bond is considered to be one of the safest as it provides low potential returns. Treasury is a high risk-return option.

It is necessary to determine the tolerance level for risk before making any kind of local or global trade investment. The tolerance level is based on the following factors -

•  Age- A young investor can take more risk and they have more time to make up for losses.

• Responsibility- The current financial responsibilities or risk capital of each individual investor determine their tolerance level. If you are the primary earner, you may want to take less risk. 

• Resources- If the current resources or net worth is more, then you can afford to put into a large investment pool and are willing to take on risk. 

• Time - Determine the time frame, which means, you should know when you plan to withdraw the money and be ready to face short term or long term fluctuations. 

Diversification into different asset classes, large/mid/small firms, bonds (private / government), and long term planning can help to lower capital risk.