Question

Graduation project entitled Risk of investment in securities?

Answer 1

Risk of investment in securities:

Securities are broadly of two types.

Debt and equity.

Debt security risks are relatively less compared to equity because they pay fixed payments and the return or the capital gain is relatively less compared to equity. However certain bonds such as Junk bond, have very high risk and accordingly fetch high return in terms of coupon payments. On the other hand a bond such as a goevrnment bond like German Bund fetch very low coupon payments as the risk is inherently very low or risk free.

Equity on the other hand has a higher risk without a fixed payment like coupons in a bond. This makes it attractive to investors with high risk appetite. These are common equities. They primarily look to capitalize on the capital gains.Preferred equities on the other hand act as a hybrid of debt and common equity and hence the risk is accordingly calibrated.

In order to minimize the risk of the investors , many investment firms operate in Mutual funds which diversify investment in order to enable investors to participate in capital markets and yet not expose them to high risk and then there are hedge funds which specialise in investing in high risk securities and short selling.