The financial market presents a number or opportunities and risks such as uncertainty, volatility, default risk, market risk, inflation risk, credit risk and liquidity risk.
Essentially, risks in the financial market make it more challenging for individuals or businesses to operate effectively. There are ways to ease the effects of these risks, such as risk management.
Before risks can be managed however, it’s important to understand the actual risks.
Inflation risk: Economic developments may affect the entire market, which will then inevitably have a palpable effect on business operations. If a spaza shop owner is reliant on members of the community for sales and economic conditions worsen, meaning that most household spending decisions change significantly, then this affects their financial outlook. The spaza shop owner should be able to plan ahead for such risks by finding innovative ways to increase sales which avoid the loss of purchasing power.
Liquidity risk: This is a question of how quickly you will be able to convert assets into cash, should the need arise. Risk is inherent in the financial market, so as an individual or business owner, you need to find ways to make some of your assets easily accessible in case of emergency.
Credit risk: This is a question of how confident you are that the company you’ve lent funds to will be able to repay the funds. There is always a default risk which means that the business should be prepared for ways to deal with this without affecting cash flow negatively.
Volatility may be due to economic events, inflation or changes in world economies. Risk management is more about avoiding high volatility situations. If you are an investor, one way of managing this risk is by choosing the buy and hold investment strategy. You should also avoid borrowing to invest if you are intent on avoiding risks in the financial market.