Financial risk is the risk that a business will not be able to meet its debt repayment obligations, which in turn could mean that the potential investors will lose the money invested in the company. The more debt a firm has, the higher the potential financial risk.
Anyone who thinks about investing will be warned about different types of financial risks, such as currency risk and methods to mitigate them, such as hedging. Financial risk is something that businesses are exposed to, and shareholders and potential shareholders must be aware of this.
Types of Financial Risk
Financial risk is a type of threat that can result in a loss of capital to stakeholders. Financial risks are everywhere and impact us in several different sizes. One should be aware of all the financial risks and understanding the threats and protecting yourself won't remove the risk, but it will minimise their harm.
Companies are also faced with the possibility of default on debt they undertake but may also experience failure in an undertaking which causes a financial burden on the company.
Various resources are available to individuals, companies, and governments that allow them to determine how much financial risk they take on. The most popular approaches used by investment professionals to evaluate long-term investment-related risks or the stock market as a whole include fundamental analysis, technical analysis, and quantitative analysis.
Technical analysis is the process of statistical evaluation of securities and examines historical returns, the volume of trade, share prices, and other performance data.
Quantitative analysis is an assessment of a company's historical performance using specific calculations of the financial ratio.