Investing involves taking certain risks. Understanding the different types of risk can help investors determine how to diversify their investments to meet long-term goals, while keeping investments in line with one’s tolerance for the different types of risk. There are several types of investment risk.

Market Risk is what most people think of when talking about risk—it means fluctuations in the market value. The value of an account moves with the underlying investment in bonds or equity markets.

Inflation Risk describes the risk that, with increases in the prices of goods and services, and therefore the cost of living, one’s purchasing power is reduced.

Liquidity Risk is when one cannot buy or sell investments quickly for a price that is close to the true value. Sometimes an investor cannot sell the investments at all if there are no buyers for it. Investments may charge a surrender fee for selling or redeeming an investment before the contractual terms, thus the investor would receive less than the original investment.

Currency Risk occurs because many world currencies float against each other. If money needs to be converted to a different currency to make an investment, any changes in the exchange rate could affect the investment return.
Sociopolitical risk is the possibility that instability in one or more regions of the world will affect investment markets.

Risk is inherent with investing. Risk is inseparable from return. Every investment involves some degree of risk. Understanding how different risks can affect investments can help investors better understand the opportunities and weigh the tradeoff between risk and reward.