Risk

When deciding whether to invest, it's key to ask yourself how comfortable you would be facing a short-term loss in order to have the opportunity to make long-term gains? Risk is a very personal thing - what may be a small amount of risk to one person may be huge to another.

The important thing to remember is that with investments, even if your investment goes down, you will have only actually made a loss if you cash it in at that time. When you see your investment value fall, this is known as a paper loss as it is not a real loss until you sell.

If you are going to invest, you need to be prepared to take some risk and to see at least some fall in the value of your investment.

Advisers have to give you clear risk warnings about the products they sell or advise on and have to explain these risks to you fully. They also have to make sure the product is suitable for you

Living with risk

Risk can never be eliminated but it is possible to manage it, by diversification - spreading your risk. Different investments behave in different ways and are subject to different risks. Putting your money in a range of different investments helps reduce the loss, should one of them fall.

It is also important to remember that risk and reward generally go hand in hand. The more risk you are prepared to take, the higher the potential reward. If you are not prepared to lose any of your money under any circumstances then you have to accept a lower level of return. If you see an investment promising a high return at little or no risk, be very wary. The old saying 'if it looks too good to be true, it probably is' almost always applies to investments.

Currency risk

You should also be aware of currency risk. Currencies - eg sterling, euro, dollars, yen - move in relation to one another. If you are putting your money into investments in another country then their value will move up and down in line with currency changes as well as the normal share price movements.

Inflation risk

Although we usually talk about the risk of losing money, there are other risks to think about. One is inflation risk. Inflation means that you will need more money in the future to buy the same things as now. When investing, therefore, beating inflation is an important aim.

Higher risk shares

Higher risk shares could include shares listed on markets such as the Alternative Investment Market (AIM) or PLUS Market; penny shares; or shares that are not yet listed - such as Initial Public Offering (IPO) or pre-IPO shares.

Firms should make you aware of the increased risk these shares may carry - for example:

However, you also share some of the responsibility. Share dealing can be a complex area so you should make sure you understand the risks involved and are happy the investment is suitable for you. Ask questions or find out more information if you're not sure about anything.

We have a community of independent financial advisers based throughout Scotland, England, Wales and Northern Ireland as well as a variety of services available over the telephone or via the internet. So even if you are not based near to one of our branches, we can still ensure that you will get quality independent financial advice from our IFA team.

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