The danger that arises from a possible depreciation of the “principal” value of an investment, i.e., when it tends to be worth less than it was worth at the time of acquisition. Principal refers to the original or initial price an investment was acquired at. Principal risk is characteristically high for common stock relative to most fixed-income securities such as notes, bonds, preferred stock, and certificates of deposit (CDs). In this logic, Treasury bills are the least risky, and emerging growth stocks are among the most risky investments. However, there are several other types of risk (such as inflation risk, exchange rate risk, etc) which also need to be considered. Generally, principal risk is the primary risk that most investors think of when making trade-offs between different sorts of investment.
January 5, 2025
