Common types Each type of investment (asset class) has its own level of risk and return. of risk with The risk and return profile of an asset class is based on past performance and market conditions. investment Asset classes are affected by a number of different types of risk – some types of risk are common to all asset classes. Common types of risk explained As share prices fluctuate according to company We introduced you to different asset classes on page 6 performance, stockmarket trends and other factors, of this guide. Each asset class can be affected by one or there is greater capital risk. While there is no limit to more types of risk. how much a share price can rise, there is also no limit to how much it can fall – you may not get back the Here are some common types of risk and a guide to initial sum invested. the asset classes affected by them: Capital risk Capital risk in bonds When you invest in bonds, you ‘loan’ a company Every investment, even cash above £75,000, carries the or government your money over a fixed period risk that you may not get back your initial sum invested of time. That company or government will pay (capital). This is known as capital risk. you ‘interest’ on the loan for the length of the bond As we explained before, equities and bonds carry a period, at the end of which it will pay back your capital. higher capital risk than cash. But out of the two, equities The capital risk in bonds comes if the company or has a greater capital risk. government goes bankrupt during your investment Capital risk in equities period. But even if that happens, bondholders are more Equities are shares in companies. When you buy equities likely to recover some of their losses than shareholders. you become part-owner of the company and your investment successes depend on the fortunes of the company. 9