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RISKS AFFECTING INVESTMENT ACTIVITY AND THEIR
CLASSIFICATION
Sobirjonova Nodira Rustamjon qizi
Namangan State Technical University
a doctoral candidate
nodirasobirjonova1994@gmail.com
https://doi.org/10.5281/zenodo.15747083
The investment process is one of the important factors for the sustainable
development and growth of the economy. Improving the investment climate,
attracting investment and developing economic activity are among the priorities
of any country. However, the investment process is associated with various
risks, the effective assessment and minimization of which is crucial for ensuring
economic stability. The economy of Uzbekistan is pursuing an active policy
aimed at rapid development and improving the investment climate. A number of
reforms are being implemented in the country to improve the investment
climate. At the same time, the issue of effective management of economic, legal
and financial risks remains an important task. The role of state policy, legal
guarantees, financial instruments and technologies in this process is of great
importance. In the modern global economy, factors such as economic instability,
geopolitical threats, inflation, exchange rate fluctuations, the complexity of
market competition, natural disasters and pandemics increase investment risks.
Therefore, before investing, investors are required to accurately assess risks and
develop effective strategies to reduce their impact on economic activity.
Since ancient times, risk has been a factor in the formation of profits.
According to J.B. Say and Courcelles Senais, risk is only a factor in the formation
of part of the profit. 1 In the 19th century, people's willingness to take risks was
explained by the fact that they led to the formation and absorption of their
profits. Today, the main part of the formed profits is formed from the effective
management of risk.
The term “risk” is found in many European languages. For example, in
Greek there is the word “ridsikon”, which means a cliff, a peak. In Italian, the
word “risiko” means danger, threat, and the word “risicare” means skillfully
going over a cliff. In French, the word “risdoe” means danger, going around a
cliff. Economic dictionaries indicate that risk means danger, the possibility of
damage and loss, the possibility of danger or going towards danger in the hope
of success.
Risk in investment activities is the uncertainty of expected results in the
investment process or the risk of losing invested funds. Investors may face
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various risks, as economic, political, financial and market conditions are
constantly changing. Properly understanding and managing these risks
increases investment efficiency.
The views of economists T. Malikov and O. Olimjanov on risk are
noteworthy. Although the term “risk” is translated in some Uzbek sources as
“risk”, “danger”, “threat” and “threat”, none of them, according to the authors,
conveys the true meaning of the term “risk”. “ Risk is the possibility of
1
losses or
income falling below the expected level . ”
a theoretical method was used in order to analyze and draw scientifically
based conclusions on the assessment of risks and the minimization of their
impact in the investment process .
In order to assess and reduce the impact of risks on the profits of
enterprises, it is important to classify them according to their various
characteristics. Therefore, it is appropriate to classify them in order to clarify the
nature and types of risks.
Classification of risks by scope: Systemic risks - risks that affect the entire
economy. For example, a global financial crisis, a sharp decline in the national
currency exchange rate, geopolitical situations. Unsystematic risks - risks that
affect a specific company or industry. For example, the failure of a single
enterprise or the dominance of a competing company in the market.
Classification by time : Short-term risks – risks that may occur within 1 year
(exchange rate changes, financial crisis). Medium-term risks – risks that may
arise within 1–5 years (changing market trends, technology obsolescence).
Long-term risks – risks that may arise over 5 years (changing industry structure,
demographic factors).
Risks according to investment types :
Portfolio investment risks – risks that arise when investing in stocks, bonds
and
other
financial
instruments.
Direct investment risks – risks that arise when investing in enterprises or
infrastructure
projects.
Venture investment risks – risks associated with investing in new startups or
highly innovative projects.
Investment activities are associated with various risks. By correctly
assessing risks and developing strategies to reduce them, investors have the
opportunity to minimize losses and receive high profits. Understanding risks
1
Malikov T., Olimjonov O. Financial management. - T.: Academy, 1999. p. 6, p. 26
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and predicting them in advance is essential for investors in making effective
investment decisions.
Investment risks include different levels of risk. They can be divided into
macro and micro risks.
Macroeconomic risks are risks that affect the entire economy, such as
government policies, economic reforms, or international developments . These
risks affect the overall market or economic system, rather than a few investors
or companies.
Main macroeconomic risks: Economic crises - decline of the economy,
decrease in production, instability of the financial system. Inflation and deflation
risks - sharp increases or decreases in prices negatively affect real returns on
investments. Currency risks - devaluation or sharp fluctuations in the national
currency can lead to losses for foreign investors and exporting companies.
Interest rate risks - the credit policy of the central bank affects the investment
process. An increase in interest rates increases investment costs and slows
down economic growth. Political risks - changes in government policy,
corruption, government reforms, changes in legislation affect the investment
environment. International risks - sanctions, geopolitical conflicts, international
trade wars or export-import restrictions. Environmental and natural disaster
risks - global climate change, natural disasters (earthquakes, floods) can have a
negative impact on the economy.
Microeconomic risks are risks that affect a single company, industry, or
project. These risks depend on the individual decisions and management
strategies of investors.
Main microeconomic risks: Enterprise risks - enterprise efficiency,
financial stability, management system, cost and profit problems. Market risks –
changes in demand for products or services, competition, emergence of new
market participants. Financial risks – company debt burden, financial
obligations, risk of bankruptcy. Technological risks – problems with using old
technologies in the production process, transition to new technologies. Supply
chain and logistics risks – disruptions in raw material supply, transportation and
storage problems. Legal risks – the company may commit a violation of the law
or face legal disputes. Internal governance risks – imperfect decision-making,
weak financial control, and low employee qualifications.
Measures to reduce macroeconomic risks: Ensuring economic and political
stability. Improving tax and investment policies. Forecasting and managing
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currency and interest rate risks. Compliance with environmental standards and
measures to protect against natural disasters.
Measures to reduce microeconomic risks: Financial planning and accurate
cost accounting in enterprises. Conducting regular market analysis and
increasing competitiveness. Introducing new technologies and increasing
production efficiency. Improving staff skills and implementing an effective
management system.
Macro and micro risks are an integral part of the investment process, and
various management strategies are required to assess and mitigate them in
advance. Through effective risk management, investors can protect their
investments and maximize returns.
Risks arise from various sources in the investment process, and it is
important to assess them in advance. Macro- and microeconomic factors,
political changes, financial conditions, and natural hazards affect the stability of
investments. Therefore, developing risk mitigation strategies and effectively
managing them is essential for the success of investments. Investment activity is
always associated with a certain level of risk. The importance of risk is that it
plays a significant role in the investment decision-making process and
determines whether an investment will be successful or unsuccessful. Investors,
companies, and financial institutions can make effective decisions by assessing
and minimizing risks.
Risk is important in investment decision-making for the following reasons:
Impact on decision-making process – Investors should consider the risks
involved before making any investment decision. Separation of profitable and
risky investments – Risk analysis evaluates potential gains and losses. Capital
Protection – If risks are not managed properly, the entire investment can be lost.
Balance between return and risk – A high-risk investment has the potential to
provide a high return, but also carries a high risk of loss.
Investors and companies use different strategies to assess and reduce risk.
Methods of risk assessment : Statistical analysis - Based on previous data,
the level of risk is assessed. Scenario analysis – Investment results are projected
under different economic conditions. Risk Rating – Each risk is rated for
likelihood and impact.
Risks play a very important role in making investment decisions. Investors
need to analyze risks in advance in order to preserve and grow their
investments. If macroeconomic, financial, market and project risks are not
properly assessed, investments can lead to losses. Therefore, the use of risk
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mitigation strategies is an important part of the investment process. Risks are
always present in the investment process, and their improper management can
lead to serious financial losses. Investors and business entities face the following
main problems:
1. Incorrect assessment of risks . Investors often fail to assess risks
correctly due to lack of information or incorrect analysis methods. Forecasting
based on historical data does not always reflect the real situation. Economic and
political changes have a significant impact on the level of risk.
2. Macroeconomic and political instability . Inflation and sharp fluctuations
in exchange rates pose risks for investors. Changes in government policies, new
taxes and legislative changes create an unfavorable environment for investment.
Restrictions or protectionist policies introduced by the government create
additional problems for investors.
3. Financial and market uncertainties. Changes in market conditions can
lead to a sharp decline in the price of stocks and bonds. Liquidity problems - the
limited ability to quickly convert assets into cash. Increased demand for debt
and credit resources makes it difficult to invest.
4. Corporate and governance issues. Ineffective management and lack of
business strategy in enterprises affect the effectiveness of investments.
Production and technological risks hinder the introduction of new products.
Personnel problems and improper management of human resources increase
risks.
A high level of risks complicates investment activities, therefore their
management is mandatory. The risk management process is essential to making
effective investment decisions and minimizing losses.
1. The objectives of risk management are as follows:1. Reducing potential
losses - Investors should minimize the risk of losing their investments. 2.
Maintaining a balance between income and risk - Investors should control the
level of risk in order to obtain high returns. 3. Ensuring the stability of business
activities - Through risk management, companies achieve financial stability. 4.
Adapting to state and market requirements - Rapid adaptation to legislative
changes is important.
There are various methods for effective risk management:
1️. Diversification- Reducing the risk of losses by spreading investments
among different industries and companies. Reduce risk by investing in different
countries and regions.
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2️. Insurance and Protection Mechanisms- Applying to insurance companies
to reduce financial losses. Use of guarantee and protection funds.
3️. Hedging strategies - Use of hedging instruments (forwards, futures,
options) in currency, financial and commodity markets. Minimize losses by
hedging with securities and assets.
4️. Analysis and Monitoring- Carefully plan investment decisions through
economic forecasts and market analysis. Regularly assess the level of risks and
take appropriate measures.
5️. Improving financial management - effective management of debt and
investment balance. Budgeting and cost optimization.
6️ . Adapting to the legal and political environment - monitoring changes in
public policy and legislation. Use of state protection mechanisms.
Conclusions and suggestions.
The study shows that the category of investment risk is the main one in the
system of financial and economic relations, because this risk is effective
management determines the high dynamics of the country's economic growth
and its competitiveness.
Risk is one of the most important factors that must be taken into account in
investment and investment processes. The use of new financial technologies,
modern financial instruments and other factors leads to the emergence of new
types of investment risks for enterprises. In this regard, since the existence of
investment risks, and especially their implementation, has a significant impact
on the volume of investment potential and the achievement of investment goals,
investment process management should not only take into account the existence
of investment risks, but also be aimed at minimizing their magnitude and
consequences.
The presence of risks in the investment process is natural, but their
improper management can lead to significant losses. To correctly assess and
minimize risks, investors should use effective tools such as diversification,
hedging, insurance, and regular monitoring. Analysis of market conditions, the
political environment, and financial risks allows for reliable and effective
investment decisions. Therefore, before embarking on any investment or
project, its risks must be carefully assessed.
List of used literature:
1. Law of the Republic of Uzbekistan "On Investment Activities", 2019.
2. Saidov H. "Investment Theory and Practice". - Tashkent: "Economics", 2021.
3. Rahimov I. "Investment activity: theoretical foundations and practical
directions". - T.: "Science and technology", 2020.
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4. Rajabov U. "Risk management in the financial and investment markets." –
Tashkent: Economics Publishing House, 2022.
5. Graham, Benjamin. "The Intelligent Investor" . – HarperBusiness, 2006.
6. OECD (2023). "Risk Management in Investment Projects " . www.oecd.org
7. IMF (2024). "Macroeconomic Risks and Investment Trends" . www.imf.org
