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Understanding Investing Risk

All investments involve a degree of Risk of some kind, but different investments have different levels of exposure to risks and to different combinations of Risks. Here are a few that investors need to be alert to.

Market risk

Your investment is carried lower on the back of a decline in the market for similar assets. Even the best companies struggle in bear markets.

Inflation risk

Your investments rise in value but not as fast as inflation. A related risk is interest rate risk – if a central bank raises interest rates in response to rising inflation, this can affect the value of interest rate sensitive
products such as bonds or high yielding shares

Asset risk

A specific catastrophe hits the value of your investment, for example a company whose shares or debt you bought goes bust or defaults on its bonds.

Counterparty risk

An intermediary with whom you are dealing becomes insolvent, trapping your investment. While you’re protected by the FSCS to some extent, getting your money back can take time and effort.

Spread Your Wealth

As your pot grows larger it’s wise to spread your cash around multiple providers to ensure you don’t exceed the government’s compensation limits in the extremely rare event that your provider goes bust and your money disappears.

Compensation Limits under Financial Services Compensation Scheme

  • The protections limits under Financial Services Compensation Scheme for investors is now £85,000 per person per firm
  • Protection limits if you hold money with a UK authorised bank, building society or credit union and if the bank failys, FSCS will automatically compensate up to £85,000 per eligible person, per bank, building society or credit union and up to £170000 for joint accounts.

    You shouldn’t invest in any financial instrument unless you understand its nature and the extent of your exposure to risk. You should also be satisfied that it is suitable for you in the light of your personal circumstances and financial position.

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