Many companies want to invest in the financial markets. But there's no question of jeopardizing the structure! Risk management for financial investments is always important, especially in times of economic slowdown. So how do you make the right decisions? Here are a few tips to help you manage your financial investments over time.
In this article, we will only discuss the risks associated with corporate financial investments. Individuals are not covered.
Investing in the financial markets as a company
The aim of a company investing in the markets is simple: to make a return! It's another way of making money. These new earnings can be used to stabilize debt, boost cash flow or reinforce credibility with other players in the sector.
Beware, however: investing always involves a risk: that of losing money. This depends on a number of criteria, including the company's activity and the type of financial operations carried out. Fortunately, companies wishing to make investments are subject to legal rules.
Companies investing in the financial markets must therefore take risks into account, to ensure excellent financial management. To limit the risks involved, it is advisable to enlist the help of professionals, whether banks or specialized investment firms. Financial risk management is a profession in its own right!
Types of risk
Liquidity risk
Appelé également « décote d’illiquidité », le risque de liquidité désigne le fait de Also known as "illiquidity discount", liquidity risk refers to the inability to sell assets. It is also the risk of having to sell them at a price well below their true value. This occurs when the company is unable to resell its inventories (due to high competition and/or lack of buyers).
The solution? Monitor cash flow, and invest in a variety of maturities and liquidities.
Concentration risk
This arises when a company has similar assets and the price falls sharply. This is the case, for example, if the company invests half its capital in a single type of asset, or if the assets have correlated prices... and these fall at the same time! You risk losing a significant proportion of your money.
The solution? As the saying goes, "Don't put your eggs in one basket". Invest in several types of assets (with decorrelated prices) to limit risk. In a word, diversify: equities, gold and precious metals, real estate, cash, etc.
Market risk
This is directly linked to the uncertain evolution of the price of the asset the company is buying. Market risk lies in buying in a "bear" market and selling in a "bull" market.
The solution? Get into a continuing program, cross-reference information sources and carry out financial and macro-economic analyses to determine the likely price of assets.
Foreign exchange risk
This risk concerns companies that carry out transactions in a foreign currency. Fluctuations in the value of this currency on the foreign exchange market can reduce the value of receivables (loss of value).
The solution? Follow the exchange rate market, position yourself on a currency pair (CHF - Dollar or CHF - Euro) or request payment of invoices in your own currency.
Risk management in asset investment
There are several ways to limit risk in financial investments:
- Identify the company's financial risks, and draw up scenarios to protect yourself against them. Get a specialist to help you.
- Avoid "timing the market": no one can predict the future! It's often difficult to enter a financial market "at the right time". Don't let your emotions guide you, but base your investments on rational investment principles. It's best to invest at regular intervals, to smooth out entry and exit prices.
- Diversify your company's investments, in terms of risk profile or sector of activity: the aim is to find investments with low correlation with each other, to ensure greater resilience in the face of crisis.
- Have a good stock allocation: invest the portfolio in the right proportions, never bet the company's entire savings at the same time.
- Calculate the opportunity cost: the money the company is tying up in this investment could be used for other investments (customer acquisition, new product launch, research & development, etc.).
As you can see, investing in the financial markets can be a risky business. Fortunately, there are many risk management solutions available. To limit mistakes, make sure you surround yourself with professionals who can advise you!
