Risk is the possibility or chance of loss. All investments involve risk--some more than others. Risk, however, is related to reward. Generally, investments with higher risk levels also offer higher reward prospects.
Investors should be aware of the risk associated with any investment they contemplate, including shares of CEFs. The following is a summary of some of the risks to be considered. Additional information should be obtained from your broker or financial adviser and the fund before finalizing your investment decision.
Market Risk - Markets rise and fall based on the prices of individual securities. Investor sentiment, economic conditions, global events and many other factors contribute to the day-to-day changes and the overall trend of the markets. Equity securities and the stock markets tend to fluctuate more widely and rapidly than fixed-income securities and the bond markets. International markets present additional risk factors. The degree of fluctuation has risen dramatically in recent years; thus, markets have become more volatile. The prospect of a market decline, and its related impact on the prices of individual securities and fund shares, represents general market risk.
Issuer Risk - The general risk that an issuer of a security will not be able to meet operating expectations or will have some other difficulty which will cause the value of an investment to decline.
Credit Risk - The risk that an issuer will default on an obligation.
Interest Rate Risk - The risk that a rise in interest rates will cause the value of an investment to decline.
Prepayment Risk - The risk that a security will be prepaid (or called) prior to maturity and that the proceeds can be reinvested only in investments offering a less attractive yield.
Inflation Risk - The risk that inflation will result in the erosion of the value of an investment.
Liquidity Risk - The risk that the market cannot accommodate the size of an order to buy or sell a security within the desired timeframe.
Political Risk - The risk that an investment in a foreign security or fund will be impacted adversely as the result of unfavorable political developments.
Currency Risk - The risk that a currency devaluation or exchange rate change will result in the decline in the value of an investment.
Leverage Risk - The risk that the cost to a fund of its leveraged capital, such as preferred stock or debt, will exceed the earning on the related assets; also, the risk of higher share price volatility.