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WHAT IS MEANT BY CAPITAL AT RISK?

Everything you need to know about ISAs

What does ‘Capital at Risk’ mean?

Understandably, ‘Capital at Risk’ is a term that seems initially alarming. It’s an important term to understand though as it is used to make investors aware that the capital they have invested (savings, assets etc) has the potential to be lost should an investment turn sour. ‘Capital at Risk’ is usually heard in relation to the stock market, where there can be an increased amount of uncertainty and volatility. Stock value can go up and down. Investments can lose value one day and gain the next.


Here is an example of ‘Capital at Risk’:

Jane invests £5,000 into one stock on the stock market. The stock performs well for several months, increasing in value, until the stock crashes and is worth a tenth of what it was originally worth. This means Jane’s investment would now be worth £500. Effectively, Jane has lost £4,500.


‘Capital at Risk’ and ISAs

Innovative and Stocks and Shares ISAs must be identified as ‘Capital at Risk’. In the case of Stocks and Shares ISAs, the capital is at risk because the ISA investment will be placed across investment portfolios on the stock market.

For Innovative ISAs, the capital is at risk because it is invested into a bond which is then loaned to companies for use in their own development projects. Most Innovative ISA companies have strict lending criteria for the companies which they work with. Typically, their loan agreements will tie their loan agreements to the assets of the company taking the loan.

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