Sources and coping strategies of securities investment risks

Securities investment risk is a very important issue in modern economic development. In the securities investment market, we encounter various risks, including foreign exchange risk, interest rate risk, credit risk, liquidity risk, securities market price risk, etc.

In today's rapidly growing economy, with a significant increase in national income, more and more funds are continuously injected into the securities market. Not only are various enterprises investing in securities, but more and more ordinary people are also entering the securities market, buying various stocks, bonds, and so on. In today's world where investment concepts are constantly strengthening and financial mechanisms are becoming increasingly perfect, terms such as stock trading seem to have become very popular. But is securities investment really that quick to get rich? High returns often come with high risks, which is a law of economics, and the same applies to securities investment. When we see people's wealth accumulated over many years being swept away by securities investment risks in real life, we feel shocking. How can we analyze it reasonably and face the securities investment risks in real life calmly?

This article analyzes the various attributes of these risks from the perspectives of mathematics and securities investment, and applies knowledge from statistics, operations research, and other fields to carry out risk management. Elaborate on how to draw on the experience of advanced countries from both theoretical and practical perspectives, and make specific analysis and serious exploration of risk management in the securities market based on China's national conditions.

This article will first discuss the definition of risk, specifically explaining the classification and specific causes of various securities risks, allowing readers to have a concrete understanding of the professional term risk, and proposing some risk management methods. Next is the core part of this article, where I introduce the measurement and prediction of securities risk. I will elaborate on the two processes of measurement and prediction, which require a lot of knowledge in mathematical statistics and several related mathematical models.

Finally, I will compare and select some risk management strategies, and introduce some principles of selection and the use of various methods to achieve the maximum effect of risk management.

Foreword

The risk of securities investment is a major issue faced by every investor and consumer, as well as a key issue for the survival and development of financial institutions. In recent years, the international securities market has been full of crises and turmoil. Every country will find these widespread risks very tricky. With the further international integration of China's securities market and the increasing variety of securities, we need to find more risk prevention research methods suitable for the healthy development of China's securities industry, strengthen the control of internal risks by securities companies and various investment companies, and establish a good investment environment for the majority of investors. It should be pointed out that the research on securities risk prevention is a very large topic. From a micro perspective, the purpose of securities risk prevention research is to reduce or avoid various possible losses in order to survive and develop in an increasingly turbulent financial environment. From a macro perspective, the purpose is to prevent the occurrence of financial crises. This article focuses on discussing from a micro perspective.

In today's rapidly growing economy, with a significant increase in national income, more and more funds are continuously injected into the securities market. Not only are various enterprises investing in securities, but more and more ordinary people are also entering the securities market, buying various stocks, bonds, and so on. In today's world where investment concepts are constantly strengthening and financial mechanisms are becoming increasingly perfect, terms such as stock trading seem to have become very popular. But is securities investment really that quick to get rich? High returns often come with high risks, which is a law of economics, and the same applies to securities investment. When we see people's wealth accumulated over many years being swept away by securities investment risks in real life, we feel shocking. How can we analyze it reasonably and face the securities investment risks in real life calmly?

The uncertainty of the future determines that humanity faces various risks in all socio-economic activities The same goes for securities investment. Overall, risks are objectively present, inevitable, and under certain conditions, they also have certain regularities. Therefore, risks can only be minimized to the minimum extent, and cannot be completely eliminated. This requires securities investors to proactively recognize risks, actively manage risks, effectively control risks, and minimize risks to ensure that losses caused by uncertainty are minimized in securities investment. In the real economic society, everyone knows that securities investment comes with risks, but they still try to profit from it. This is not only driven by profit, but more importantly, most investors seem to be inclined to believe that they can manage this risk and control it at a very low level through rational analysis. Is it true that there are a large number of "experts" in today's stock market who seem to be able to accurately predict the market's movements?

Overview of Risk 1

1.1 Concept of Risk

The risk in securities investment refers to the possibility of economic losses caused by incomplete or uncertain future information. This can be summarized into three situations: ① Securities investment risks may cause direct losses to people. ② Securities investment risks may bring relative losses to people. ③ Securities investment risks may bring potential losses to people.

The risks of securities investment have the following characteristics:

Firstly, the objectivity and universality of the existence of risks. As an uncertainty of loss occurrence, securities investment risk is an objective reality that is not transferred by the will of the securities investment subject and exceeds the subjective consciousness of the securities investment subject. Moreover, throughout the entire period of the securities investment project, risk is ubiquitous and always present. This explains why although many securities investment entities have attempted to recognize and control risks, until now they can only change the conditions under which risks exist and occur within limited space and time, reduce their frequency of occurrence, and minimize the degree of loss, but cannot and cannot completely eliminate risks.

Secondly, the contingency of a specific risk and the inevitability of a large number of risks occurring. The occurrence of any specific risk is the result of multiple risk factors and other factors working together, and is a random phenomenon. The occurrence of individual risk accidents is accidental and chaotic, but through observation and statistical analysis of a large amount of securities data, it is found that they exhibit obvious patterns of movement. This makes it possible for securities investment entities to use probability statistical methods and other modern risk analysis methods to calculate the probability and degree of loss of risk occurrence, and it is also the basis for risk management of securities investment entities.

Thirdly, the variability of risks. This refers to the changes in the quality and quantity of various risks throughout the entire process of securities investment projects. As the securities investment project progresses, some risks will be controlled, while others will occur and be dealt with. At the same time, new risks may arise at each stage of the project. Especially in large-scale projects, due to the numerous risk factors, the variability of risks is even more evident.

Fourth, the diversity and multi-level nature of risks. The long cycle, large scale, wide scope, numerous and diverse types of risk factors faced by large-scale securities investment projects result in a wide range of risks throughout their entire life cycle. Moreover, the inherent relationships between a large number of risk factors are complex, and the cross influence of various risk factors and external factors makes the risks appear multi-level. This is one of the main characteristics of risk in large-scale securities investment projects.

The uncertainty in securities investment includes "external uncertainty" and "internal uncertainty".

1.1.1 External Uncertainty

External uncertainty comes from outside the economic system and refers to the random and unpredictable changes and trends in the economic operation process, such as macroeconomic trends, market supply and demand of funds, political situation, technology and resources, etc. At the same time, external uncertainty also includes uncertain shocks in foreign financial markets. Generally speaking, external uncertainty has an impact on the entire securities market, so the risks caused by external uncertainty become systemic risks. Systemic risks cannot be eliminated through investment diversification, but can only be transferred through certain measures.

1.1.2 Intrinsic Uncertainty

The inherent uncertainty is caused by subjective decisions of actors and insufficient information obtained within the economic system. For example, changes in a company's management level, product sales, credit quality, production scale, etc. all affect its ability to fulfill its obligations, and even internal personnel appointments and the physical condition of responsible persons can affect the prices of its stocks and bonds. The inherent uncertainty performance reduces its risk by setting reasonable rules and diversifying investments, so the risk generated by inherent uncertainty becomes non systematic risk.

1.2 Types of Risks

There are various types of securities investment risks, among which the most important ones are interest rate risk, exchange rate risk, market risk, corporate risk, purchasing power risk, and associated risk.

1.2.1 Interest rate risk

Interest rate risk refers to the possibility of losses in securities investment caused by market interest rates. The price of securities is closely related to interest rates, generally in inverse proportion. When market interest rates rise, the price of securities decreases; Market interest rates decrease, while securities prices rise. Taking bonds as an example, when interest rates increase, the yield level of newly issued bonds will be higher than that of already listed bonds, resulting in a decrease in the price of already listed bonds to match their yield level with the new interest rate. On the contrary, when interest rates decrease, it will also drive up the prices of already listed bonds.

For stocks, changes in interest rates can alter people's expectations of returns and affect the supply and demand relationship in the stock market, leading to fluctuations in stock prices. In addition, changes in interest rates are also a barometer of national economic policies. When a country wants to implement a loose monetary policy, it usually needs to lower interest rates to achieve the goal of reducing corporate financing costs. Therefore, I believe that paying attention to the interpretation of national policies in stock investment is beneficial for improving our ability to choose stock varieties for investment and reducing the damage of interest rate risk to us.

1.2.2 Exchange rate risk

Exchange rate risk refers to the uncertainty of losses caused to individuals by fluctuations in exchange rates. When examining exchange rate risk, it is necessary to study it from three types of exposures: transaction exposure, conversion exposure, and economic exposure.

Transaction exposure refers to the potential loss of an economic entity's expected cash flows due to the impact of exchange rate fluctuations. For example, in foreign exchange trading, if the exchange rate of a currency drops, long holders of that currency will suffer losses, and vice versa.

Conversion exposure refers to the uncertainty of the book value of foreign currency accounting items in foreign-related enterprises caused by changes in exchange rates. For example, when the London branch of Bank of China transfers its business revenue to the comprehensive account of the head office of Bank of China, its value expressed in RMB is inevitably affected by the exchange rate fluctuations between the pound and RMB.