What are Risk Assets? Definition, Types, Examples, and How to Reduce Losses

Hello Mudalovers , business trips cannot be separated from financial activities. It is believed that good financial management will make it easier for someone to achieve their business goals. It is not surprising that this is often associated with the term risky assets.

It is believed that risky assets that are managed well can save a company from losses and bankruptcy. Therefore, we need a deeper introduction to this terminology so that we can run our business well in the future. Below are some risky assets to watch out for.

Continuous debate in running a business is not far from the issue of financial management to achieve business goals. The term often discussed refers to risky assets.

Risky assets are an important factor that can affect a company’s operations in such a way that if left unchecked, it will result in losses for the company. For that, we need to know more about this term. Before understanding the meaning of risky assets, let’s understand the meaning of assets first.

Definition of Assets

Assets are assets, property and wealth holdings that support business operations and can be exchanged for cash. All corporate assets refer to physical or non-physical resources acquired through transactions and are the result of past activities.

Assets can also be defined as assets of a business entity in the form of rights or goods obtained by the entity through past activities or transactions, which must be measured in monetary units. The two definitions above conclude that assets are resources that can be used to carry out various activities such as Operations, Financing and Investment.

The definition of assets includes various types of assets or assets owned by a company. This wealth may have existed from the start, or may be the result of a company’s efforts over a certain period of time. Can also be called an asset.

Because we know that everything that can be valued with money can be called an asset.

Assets, on the other hand, are usually used as a term to describe title. As a business person, you often struggle with financial reporting, so you must be familiar with this term.

It is said that a good company is a company that manages its assets well. This can be seen from how the company manages these assets to produce   optimal returns .

Assets are assets that are not just stored. However, the company allowed him to work for the benefit of the company. Of course, management must be calculated and carried out carefully. One wrong step could result in the company losing its assets.

Understanding Risky Assets

First, of course, we will discuss the definition of risk assets themselves. Therefore, risky assets are company assets or assets whose returns are uncertain. This uncertainty is often associated with  volatility  or significant price fluctuations.

In banking,  this volatility  is caused by fluctuations in credit interest rates, credit quality, and possible risks in repayment of fixed assets. On the other hand, price fluctuations may occur due to lower interest rates, higher repayment risks, and lower credit quality.

One of the high-risk assets is  cryptocurrency . Behind the high risks there are many equal benefits. It’s no wonder some people invest in risky assets to make a profit.

Risk assets can be described as assets, or assets, owned by a company whose return is uncertain. Professionals generally associate risk assets with assets that exhibit significant levels of price volatility, such as stocks, commodities, high-yield bonds,  real estate , and currencies.

In the banking and finance sector, risky assets include assets whose value frequently fluctuates due to changes in interest rates, creditworthiness, repayment risk, and other factors. It is described as high risk due to the uncertainty of the rate of return that will be achieved in the future.

For example, an investor buys Gojek shares now and plans to hold the shares for one year. At the time of purchase, we will not understand the return.

Therefore, return on investment, or  return on investment , is determined by Gojek’s share price for the following year and the value of dividends for that year. This shows that shares are a risky investment.

This includes government-issued securities (bonds) that are classified as risk assets. For example, in the case of a bond with a maturity of 30 years, the investor cannot calculate the return that would be earned by holding the stock.

Relationship between Risky Assets and Investment Portfolio

Each asset actually has a direct proportional relationship to the investment portfolio. In other words, as the value of your assets declines, so does the value of your investment portfolio. As the value of these assets increases, so does the overall investment portfolio.

Some examples of financial instruments classified as high-risk assets include  cryptocurrencies, mutual funds, stocks, bonds, foreign exchange, and publicly traded products.

Among all these products,  cryptocurrency  is one of the newest and is highly sought after by the general public.  An example of a high-impact cryptocurrency product  is Bitcoin. If the price of Bitcoin spikes, the prices of most  cryptocurrency products  will follow suit or rise rapidly.

In fact, investors dive into the world  of cryptocurrency  because they want to make quick profits. Please understand that  cryptocurrency prices  may change at any time. Coupled with 24-hour markets, investors have more flexibility in redistributing their capital.

However, you should be aware that fast returns on investment come with big risks. A sufficiently severe price decline automatically wipes out previously obtained profits. Ultimately, this causes undue worry and speculation.

Additionally, a portfolio is defined as a collection of financial investments, including stocks, bonds, commodities, mutual funds, cash, cash equivalents, and all listed assets, and most recently  cryptocurrencies.

The impact of risky assets can be seen during periods of uncertain rise and fall in the value of cryptocurrencies, for example fluctuations that indicate market conditions. At that time, the  cryptocurrency market  was still following the rise in Bitcoin prices.

If the price of Bitcoin rises, it will affect the state of the entire crypto market, which is experiencing a rapid surge. Most traditional financial institutions are immersed in the blockchain world that underlies  cryptocurrency transaction verification .

Cryptocurrency  beginners  are earning huge returns, and other interested investors want to get rich with their investments, but they cannot yet measure the magnitude of the risks involved. Investor appetite is slowly attracting new investors.

Ultimately, this digital currency investment hype reached the point of risking a sudden and sharp decline. This situation led to a sharp drop in value, wiping out not only profits, but the entire value of some cryptocurrency investments.

Increasing debate about potential regulation of  cryptocurrencies , coupled with concerns about excessive speculation, has contributed to the decline of these risky assets.

Read Also : What is a Cash Account? Definition, Types and Criteria

Types of Risky Assets

1. Cryptocurrency

Many investors say  cryptocurrency  is one of the riskiest assets. The lack of a money-back guarantee due to a decline in the value of  cryptocurrency  means that investors will lose some of the profits they might receive if the value of  cryptocurrency  rises.

Cryptocurrency profits or losses   depend greatly on the value of Bitcoin and global economic conditions. Negative news can cause  cryptocurrency prices  to plummet, resulting in losses for investors.

Before investing in  cryptocurrency , it is important to consider the amount of capital you are investing. Make sure your capital is money you are willing to lose considering that total  cryptocurrency  losses can reach 90% of your capital. Without this readiness,  cryptocurrency  is not a suitable financial instrument.

However, with a limited production run of 21 million pieces from the start, the value has increased over time. Therefore, the existence of Bitcoin ( cryptocurrency)  is not only a medium of exchange, but also an investment, just like other currencies. According to  Luno.com  in 2012, 1 Bitcoin (BTC) was worth IDR 80,000.

However, at the beginning of 2020, one bitcoin exceeded 115,597,500 rupees! Bitcoin is known as digital gold, and with its value continuing to soar, it is not surprising that Bitcoin has become an investment choice.

But despite its dramatic rise in value, Bitcoin carries significant risks. Performance is highly volatile and unpredictable, and can suddenly plummet overnight. If you decide to invest in Bitcoin, study all of Bitcoin carefully and fully understand the risks.

2. Shares

After  cryptocurrency , there are stocks that are included in the list of risky assets. The success or failure of an investor in stock investment depends greatly on their knowledge and skills in analyzing market conditions.

This is because investors can use this analysis to determine whether the price of a share will rise or fall.

Besides price volatility, the risk of playing stocks is whether they will pay dividends to investors every year. Dividend payments are based on the company’s performance for one year.

Therefore, to predict the risk of losing large amounts of money, the level of risk and reward obtained must be considered as closely as possible.

Shares are securities that represent ownership of a company or entity. Therefore, when you buy shares in Maju Makmur Company, you are registered as a private investor and as one of the owners of the company.

Stocks have long been a favorite tool of profit seekers around the world. This is because the benefits of investing in shares are endless. Thus, the risk of stock investment increases. Stock price movements tend to fluctuate, so choosing them to support short-term financial goals is not appropriate.

Read Also : What are Collateral Assets? Definition, Advantages, Disadvantages and Examples

Equity Investing in Stocks

Equity is an option for achieving long-term financial goals of 10+ years. Long-term investments are also affordable to start investing in shares. You can buy a minimum of 1 lot (100 shares) of shares on the Indonesia Stock Exchange (ISE).

So, for shares priced at IDR 1,000 per share, you can get 1 share slot by just spending IDR 100,000. Long-term equity investment strategies you can use are value investing, growth investing, or stock savings.

However, experts explain that equities are among the riskiest asset classes. No guarantees are given and the money investors give to the company depends on the company’s success or failure in a competitive market.

Profits and dividends paid to investors also depend on the company’s financial situation. Capital owners must be able to achieve a balance between the level of risk and the level of return on capital. The bigger the win, the higher the risk of losing money.

3. Stock Mutual Funds

Stock mutual funds are a type of high-risk investment asset. Equity mutual funds, on the other hand, also have the prospect of higher profits and returns. Due to its high risk, this investment product is suitable for supporting long-term financial goals of 5 years or more.

You may consider supporting financial goals such as retirement funds, school fees for your future children.

What is a Mutual Fund? Mutual funds are basically a container that holds a collection of funds from various investors, with these funds managed by an investment manager and rotating underlying assets such as shares and bonds.

Therefore, equity funds mean that the investor’s money is invested in assets in the form of shares. Stock mutual fund performance benchmarks usually refer to equity indexes such as the Composite Stock Index (IHSG) or Sector Equity Index, depending on the characteristics of the stock mutual funds selected.

Equity mutual funds are inexpensive to invest in. Today, you can invest from IDR 100,000 in this high-risk instrument. Oh yes, stock fund return growth can be 20% or more per year. However, when stock market conditions are bad, performance can also be negative.

4. Peer to Peer Lending (P2P Lending)

This is a new investment method that has become a hit since the advent of financial technology applications. Investing in loans means acting as a lender or as a lender to institutions or individuals who need loans.

The loan financing process is made easier with the loan market.  The return on lending  investment is very high and can reach 20% per year. However, the average investment or credit term available is short term, up to 3 or 6 months.

Investing in  lending  is very risky and has the potential for large profits. When you are the lender, the money you borrow can be lost altogether if the borrower cannot pay it back.

This is also called  default.  By choosing  a P2P lending marketplace  that uses a trusted rating system, you can minimize the risk of investing in P2P lending. Also, choose a loan with reliable collateral, such as invoice collateral for large businesses.

We also diversify our lending so that the risk of loss is spread out and minimized. Here are four risky investment asset opportunities that are suitable for young people that you can consider.

To manage your risk of loss, stick to the principle  “Don’t put all your eggs in one basket.” Be careful not to put them in one basket. Spread your investments across instruments with different levels of risk so you can better manage the risk of loss.

5. Real Estate

The 2008 financial crisis may have revealed that  real estate  is not always worth its value. This means that  real estate  carries additional risks that other types of assets do not. Consideration of environmental risks and maintenance costs when investing in  real estate  must be commensurate with potential returns.

Real estate , long considered safer than stocks, experienced a downturn in the late 2000s as  real estate  was valued in many parts of the United States. Like shares,  real estate  is not guaranteed.

Risk assets must be managed appropriately to reduce the adverse impact of changes in income value. The risk of changes in interest rates and economic conditions can affect prices during trading. Risk assets include equities, commodities, high-yield bonds, real estate, and currencies.

How to Reduce Losses from Risky Assets

Allocate capital appropriately

The first tip to keep in mind to minimize losses when investing is to allocate capital correctly across various assets. For example, diversify your investments in cryptocurrencies, stocks and gold. Whatever product you think is most suitable, the important thing is not to put money into the investment.

Even if one asset is unprofitable, there are still other assets that are profitable. Any losses that occur can be offset by various profits from other assets. Financial burden is automatically relieved.

Choosing the Right Assets

It is important to first identify your investment goals to choose the right assets, especially when investing in risky assets. Because the financial market itself has various types of assets that can be obtained. There are shares, mutual funds, bonds, and finally deposits. These assets offer returns with varying levels of risk.

For assets with minimal risk, you can choose a deposit. However, for risky assets, you can choose shares. Adjust your risk profile so you don’t make the wrong choice and suffer losses later.

Calm When Your Assets Go Down

An equally important tip is to stay calm when assets fall. Understand that investing has its ups and downs. The win/loss ratio is usually even, so you won’t always win. Also, you don’t always lose.

Asset prices can bounce back when market sentiment turns positive, so it is important to be patient when experiencing large losses. If you have excess capital, use the decline to buy other depreciating assets. If the price goes up, you can get maximum profit.

Read Also : What Are Cash Equivalent Assets? Definition, Types, Objectives and Functions in the Business World

Do not exaggerate

The biggest fear many people have when investing is losing money. That’s why some people don’t want to invest because they don’t want to bear the risk of losses that will occur. Although losing is normal as long as you can approach it aggressively rather than overdoing it.

Not exaggerating, I mean willing to borrow to get capital to invest. Continue to invest money in reasonable portions according to your financial situation. Don’t be afraid of  FOMO  or missing your train because there are many other benefits you can get on various occasions.