Are there any risks associated with investing in capital markets?
Last Updated on Friday 29th November 2013 08:31
Yes, although there are many advantages for investors, as well as the possibility of higher profit, investing in capital markets carries a lot of risks which include:
- Risk of loss – The capital market does not have guaranteed returns especially when investing in ownership instruments such as shares and unit trusts. If dividends are not paid because the company's performance is negative and the share price falls at the same time, the investor can incur significant financial losses in the form of capital losses. Moreover, in company liquidation, the shareholder is ranked last in the order of payments out of the liquidation assets.
- Capital market performance is highly depended on the general macro and micro economic environment which the ordinary investors have no control over, for instance, Government policies with a negative impact on capital market operations
- Unethical practices – Investors are not involved in the day to day operations of companies they would have invested in and their investments would be left in the hands of the company management and directors which can mismanage the investments.