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Different types of investment risk
The term 'investment risk' refers to a range of different types of risks you could face when saving and investing. Learn more about these different risks.
The phrase ‘investment risk’ is a broader catch-all that includes various different types of risk.
Risk’s the possibility of something bad happening, with an uncertain outcome. In the case of investing, it’s the chance of your money or investments losing value.
There are different reasons this can happen. Understanding why can help you make informed choices with your money. That way, you can aim to grow your money while minimising risk as far as possible.
Interest rate risk
Interest rate risk is the effect that changing interest rates can have on your savings and investments.
That might be an unexpected movement in rates, causing your investments to shift in value. Or it may be a longer-term, planned change that you’re unable to respond to.
Interest rates can affect many forms of savings and investments.
It’s possible to roughly predict which way interest rates might move in the short term, based on factors like economic growth and inflation. But the risk is that, unless you have a crystal ball, it’s difficult to know exactly what they’ll be in future.
As a result, when you save or invest in assets that depend on interest rates, you could face interest rate risk.
Inflation risk
Inflation measures how fast prices are rising. Inflation risk’s the chance of your money falling behind the cost of living if your returns don’t keep its value in line with rising prices.
So, if inflation is 5% for a year, something that costs £100 will cost £105 the year after.
If your money doesn’t keep up with inflation, it loses its spending power. For example, imagine that you have £100 of savings in an account paying 3% interest a year.
In a year’s time, even though your £100 has grown to £103, it can’t buy the same amount of goods and services, because they now cost £105.
That’s inflation risk - if your money isn’t growing as fast as prices are rising, its spending power slowly decreases over time.
This is why it can be sensible to invest money as well as save it. While cash can outperform inflation, investments have an even greater potential for growth.
Figures from a UBS study show that, in the US from 1900 to 2025:
Past performance doesn’t necessarily tell you what’ll happen in future, or in the UK. But, although cash did beat inflation, your money would’ve grown more had you invested it.
Capital risk
Capital risk’s the chance of an investment you hold dipping in value, or even losing it entirely.
It’s probably closest to the broadest definition of investment risk that most people use.
It applies to various types of investments, but it’s most commonly associated with things like:
You’ll pay to buy these investments with the hope that they’ll rise in value. However, they could also fall - that’s capital risk.
The key is that capital risk is closely linked to reward. In general, the more capital risk you take, the higher the potential returns you could achieve.
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Market risk’s the potential for your investments to lose value as a result of a dip in an entire market. It’s similar to capital risk, except that rather than applying to individual investments, it’s the market as a whole.
For example, imagine that you’re heavily invested in the US. If the economic or political landscape changes there, the whole market could dip. That’s market risk.
It isn’t just countries where market risk matters. It can also affect whole regions, such as Europe or Asia. Or it might be specific industries and sectors, from manufacturing to information technology.
To mitigate this risk, it can be sensible to diversify across different markets. You could do that by investing in different continents, countries, sectors, and industries.
That way, if one of these slips up, any losses you experience - temporary or otherwise - could be covered by gains elsewhere.
Credit risk
Credit risk’s where a borrower defaults - that’s becoming unable to pay - on their debts.
You could be affected by credit risk directly. For example, if you’re investing in bonds, the company you’re lending to may become unable to pay you back. The same is true for governments, although this is usually less likely.
In that case, you’d lose out on the interest payments you would’ve received from the bond. You may lose some or all of your initial investment, too, rather than getting it back at the end of the term.
You could also be affected by credit risk indirectly, such as by companies you’ve invested in defaulting on their debts. This could affect the company’s financial future, leading to its share price falling.
So, you don’t necessarily have to be the lender to be affected by credit risk.
Choosing the right amount of risk
Risk is highly personal, and the right amount for someone else might not be suitable for you.
To help you choose investments that you’re comfortable with, it’s worth working out your risk tolerance. That’s a measure of how much risk’s sensible for you, based on your:
- Capacity for risk - how much risk you can take when you think about your money as a whole.
- Need for risk - the amount of risk you’d need to take to achieve your financial goals.
- Attitude towards risk - your personal feelings towards risk and how it affects you emotionally.
By working out your risk tolerance, you may be better able to work out how much is right for you.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
Last edited: 22-10-2026
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