Understanding risk is essential to the investment process but remains a concept that many investors out there don't understand. Risk warnings refer to the vaguely worded disclaimers that you'll see at the bottom of critical financial documents and investment websites. These statements are critical to both buyers and sellers and in the entire investment process.

Typically, an investor requires a substantial level of experience and sophistication to know what those warnings mean and the implications that they have on your investment in the long run. In most cases, an investor may need to seek professional advisory services to understand the risk warning guide and avoid scammers.

As an investor, you need to understand that some sellers want to keep you in the dark to make a sale and generate profit. This post covers the various risks of investing to help you figure out what you need to know before you embark on your investment journey.

Where Do Investment Risk Warnings Appear?
In most cases, financial institutions and investment firms publish their investment risk warnings on their websites and brochures. The primary objective of these warnings is to explain to any potential investor the nature of risks involved in any kind of investment being offered by the firm and to ensure that no lawsuits are filed against it in case things go bad.

When published on a company website, the risk warning may be in a separate internet link or printed on one of the pages. Most companies use a small font to outline the risks, and the length will vary greatly from one investment firm to the other. Some warnings may be too vague and lack quantification.

What Are the Common Types Of Investment Risk?
You are exposed to different types of risk whenever you invest. In this section of our investment risk warning guide, we look at how various risks can affect your investment returns:

• Market risk: This refers to the risk of your investments decreasing in value as a result of unexpected economic developments or other factors that you can't control. The common types of market risk include: equity risk, currency risk, and interest rate risk.
• Credit risk: There may be a risk that the company or government entity that issued that specific bond runs into financial problems and is unable to pay your interest and principal upon maturity. This is what is often referred to as credit risk and mostly applies to debt investments such as bonds.
• Inflation risk: Inflation risk refers to the risk of losing your purchasing power because the overall value of your investments can't keep up with the rate of inflation. Typically, inflation erodes the purchasing power of a given currency over time. This means that the same amount of money can only purchase fewer good or services.
• Concentration risk: This is the risk of loss because your money is stashed in one investment. The good thing is that you can easily avoid concentration risk by diversifying your investment. You can spread your risk over various types of investment, industries, and even geographical locations.
• Liquidity risk: This refers to the risk of being unable to sell your investment (s) and a fair cost and get your money out whenever you want to. To sell your investment (s), you may be forced to accept a relatively low price.

Criteria for a Good Risk Warning
A good investment risk warning must fulfill the following conditions to get the right message across; otherwise, you may be dealing with scammers.

• A risk warning should be easy to follow: A good investment risk warning should be written in simple and plain language. If you don't understand what the risk warning is all about, don't assume that it is the right investment for you just because you trust the financial institution or investment firm.
• Quantification: It is always a good idea for the investor to have an idea regarding the proportion of money that investors are most likely to lose.
• Signing is critical for both parties: Make sure that both you and the company sign the agreement outlining the risks of investing in a particular asset with the company. However, never sign something that you don't understand.
• Internet warning: If you have to agree to the risk warning on the company's website, make sure that the message is quite clear and the investor prompted you to take the warning seriously.