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Both the income produced from an investment in the form of dividends
or distributions and the capital invested are subject to volatility
and therefore risk. The level of volatility varies depending upon
the type of investment.
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Guaranteed investments: no volatility e.g. current and deposit
accounts and National Savings.
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Low risk investments: gilts are not completely risk free
as between purchase and the redemption date their value fluctuates
according to demand. Securities issued by foreign governments can
be more risky depending upon which government issued them. They
are also subject to currency exchange rate variations.
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Balanced or medium risk investments: corporate bonds issued
by companies. These are more secure than shares issued by the same
company. However, their redemption is dependent upon the continued
existence and financial strength of the issuer.
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High Risk investments: ordinary and preference shares are
both high risk investments. Preference shareholders have an advantage
as they have a right to income before ordinary shareholders. If
a company fails preference shareholders receive a proportion of
any remaining assets before ordinary shareholders who may receive
nothing.
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Collective investments: the risk and volatility of a share
held within a collective investment is the same as if the share
is held directly. However, as collective investments contain a wide
spread of investments the risk is lessened. The volatility of a
fund depends upon the spread and make up of the underlying investments.
Tracker funds must mirror the investment spread of the chosen index
and will rise or fall in price according to movements in the index.
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Speculative investments: these are high risk investments
that in a worse case scenario an investor may receive no income
and lose the capital invested. Examples include commodities and
futures and options.