Investment in all forms and types is risky.
Investment risk is the probability of unexpected financial losses in a situation of uncertainty in the investment environment.
Investment risks can be classified by:
Investment Risk Areas:
1. Technical and technological risks are related to uncertainties affecting the technical and technological component of the project, such as reliability of equipment, predictability of production processes and technologies, their complexity, level of automation, rate of modernization of equipment and technologies, etc.
2. Economic risk is related to uncertainties affecting the economic component of investment activity in the State and the activity of the economic entity in the implementation of the investment project within the framework of the objective of achieving the general economic equilibrium of the system and accelerating the growth rate of its gross national product by producing competitive products on the world market, Selection of rational combination of forms and spheres of production, implementation of state measures on countercyclical regulation of economy, etc.
Economic risk includes the following uncertainties:
- the state of the economy;
- the State 's economic fiscal, financial, investment and fiscal policies;
- Market and investment conditions;
- the cyclical nature of economic development and the economic cycle phase;
- state regulation of economy; dependence of national economy;
- Possible non-compliance by the State with its obligations (partial or total expropriation of private capital, various types of defaults, termination of contracts and other financial shocks), etc.
3. Political risks are related to the following uncertainties that influence the political component of investment:
- elections at different levels;
- Changes in the political situation;
- Changes in State policy;
- political pressure;
- Administrative restriction of investment activities;
- Foreign policy pressure on the state;
- freedom of speech; separatism;
- Deterioration of relations between States, which may have a bad impact on joint ventures, etc.
4. Social risks are associated with uncertainties affecting the social dimension of investment, such as social tensions; strikes; implementation of social programs.
The social component is due to the desire of individuals to create social ties, to provide assistance to each other, to adhere to their mutual obligations;
The role they play in society; office relations; Moral and material incentives; Existing and possible conflicts and traditions, etc.
The ultimate case of social risk is personal risk, which is related to the inability to accurately predict the behavior of individual individuals during their activities and is due to the human factor.
5. Environmental risks are related to the following uncertainties that affect the state of the environment in the State, region and influence the activities of the invested objects: pollution, radiation, environmental disasters, environmental programmes and environmental movements as "Green peace," etc.
Environmental risks are divided into the following types:
- man-made risks related to emergency situations related to the following factors: man-made disasters at enterprises causing contamination of the environment with radioactive, toxic and other harmful substances;
- natural and climatic risks are related to the following uncertainties affecting the implementation of the investment project:
- geographical location of the facility;
- Natural disasters (floods, earthquakes, storms, etc.);
- climatic cataclysms;
- Specific climatic conditions (arid, continental, mountainous, marine, etc.);
- Availability of minerals, forest and water resources, etc.;
- social risks are related to the following uncertainties affecting the implementation of the investment project:
- the incidence of infectious diseases in the population and animals;
- Mass distribution of plant pests;
- Anonymous calls about mining various objects, etc.
6. Legal risks are related to the following uncertainties affecting the implementation of the investment project:
- changes in the current legislation;
- discrepancy, incompleteness, incompleteness, inadequacy of legislative and legal base;
- legislative guarantees;
- Lack of independence of proceedings and arbitration;
- Incompetence or lobbying for the interests of individual groups in the enactment of legislation;
- Inadequacy of the existing tax system in the State, etc.
By form of manifestation, investment risks are divided:
1. Real investment risks that may be associated with:
- interruptions in the supply of materials and equipment;
- rising prices of investment goods;
- selection of a non-qualified or unscrupulous contractor and other factors that delay commissioning of the facility or reduce revenue during operation.
2. Financial investment risks related to:
- ill-conceived choice of financial instruments;
- unexpected changes in investment terms, etc.
By origin, investment risks are divided into:
1. Systematic (market, undiversifiable) risk, occurs for all investment participants and all forms of investment.
It is determined by the change of stages of the economic cycle, the level of solvent demand, changes in tax legislation and other factors that the investor cannot influence when choosing the object of investment.
2. Non-systematic (specific, diversified) risk that is specific to a particular investment object or investor.
It can be related to the competencies of the personnel of the management of the enterprise; Increased competition in this market segment; Unsustainable capital structure, etc.
Unsystematic risk can be prevented by diversification of projects, selection of optimal investment portfolio or effective project management.
Investment activities are characterized by a number of investment risks, the classification of which by type may be as follows:
- Inflation risk means the probability of losses that an economic entity may suffer as a result of depreciation of the real value of investments, loss of real original value by assets (in the form of investments) while maintaining or increasing their nominal value, as well as depreciation of the expected income and profit of the economic entity from investments in the context of uncontrolled advance of inflation growth over growth of investment income.
Deflationary risk is the probability of losses that a subject may suffer in the economy as a result of a decrease in the money supply in circulation due to the withdrawal of part of excess cash, including through tax increases, interest rates, budget cuts, savings growth, etc.
- Market risk - the probability of change of cost of assets as a result of fluctuation of interest rates, exchange rates, stock quotations and bonds, the prices of the goods which are subject to investment. Market risk types include currency and interest rate risk
- Operational investment risk - potential for investment losses due to technical errors in operations; Due to deliberate and unintentional actions of the staff; emergencies; Failures of information systems, equipment and computer equipment; Security violations, etc.
- Functional investment risk is the probability of investment losses due to errors in the formation and management of the investment portfolio of financial instruments.
- Selective investment risk - The probability of incorrect choice of investment object compared to other options.
- Liquidity risk is the probability of losses caused by the inability to release investment funds in the right amount without loss in a fairly short period of time due to market conditions. Liquidity risk also means the probability of a shortage of funds to fulfill obligations to counterparties.
- Credit investment risk occurs if the investment is borrowed and is likely to change the value of the asset or to lose its original quality as a result of the inability of the investor borrower to perform its contractual obligations, both in general and for individual items under the terms of the loan agreement.
- Country risk - Potential for loss of investment in facilities under the jurisdiction of a country with a precarious social and economic situation.
- Risk of loss of profits means the likelihood of indirect (incidental) financial damage (non-receipt or loss of profits) resulting from the failure to perform an activity, such as insurance.
It should be noted that this classification is to some extent conditional, as it is difficult to draw a clear boundary between certain types of investment risks.
A number of investment risks are related (correlated with each other), changes in one of them cause changes in the other, which affects the results of investment activities.