What is Finance Risk ? Tips To Avoid

It studies both the obtaining of these resources (financing), as well as the investment and saving of them.The impossibility of return of capital by one of the parties and the instability of the financial markets.

How are risks classified?

Credit risk : it occurs when one of the parties to a finance contract does not assume their payment obligations . For example, if a buyer takes out a loan to buy a car, he is committing to return that money with interest. The risk of credit is linked to the possibility of a debt default occurring.

Market risk : This is what we find in operations framed in finance markets. Within this type, we distinguish three types of risk based on market conditions:

Interest rate risk : As its name suggests, it refers to the risk that interest rates will rise or fall at an undesirable moment. It is the case that you have a mortgage and the Euribor, for example, increases.

Market risk: it is one of the most common risks. This is the risk of losses occurring in a portfolio as a result of factors or operations on which that portfolio depends.

Liquidity risk : it occurs when one of the contractual parties has assets but does not have sufficient liquidity with which to assume its obligations. When a company cannot meet its short-term debts or by selling its current assets, said company finds itself in a situation of illiquidity. In addition, it can also happen that a company may find itself in a phase of continuous portfolio losses, until the moment arrives that it cannot pay its workers.

Five tips to minimize finance risk

1. Anticipating the future

The capture of information is an important element, since if you know how to handle that information it will allow us to follow an innovative business strategy that will help us decide on our products and services, react to our competition, anticipate the changes that are taking place in the market , in technology, etc.

2. Evaluate the results obtained.

Counting on a professionalized administration , that is, highly specialized in the new trends of the financial system, we can get ahead in the face of these risks.

3.  Use tools for financial risk management

Protect certain assets by taking out insurance.

4.  Diversify risk

It diversifies by planning an investment portfolio that balances high-risk operations with high-security ones.

5. Evaluate the profitability of the investment

It is the first way to minimize risk, bearing in mind that the more information you have about what you want to invest, the lower the risk.

Differences between finance and economics

Simply put, finance is a branch or sector of the vast world of economics . Therefore, both disciplines interrelate and affect each other.

However, economics has a much broader focus: it studies the ways in which human needs can be met through the production methods available to them. Finance, seen this way, focuses only on what is linked to money, and especially in what is related to industry and the business world.