Risk and Return
United States - New York
What is Risk and Return? We look at this important concept discuss the various types of investments and how much risk is attached to them.
The Basics of Risk and Return.
In the back of every investors mind is the word profit, any good investor knows that without risk they may never gather high returning yields (the amount in cash that returns to the owners of a share). Different assets have different degrees of risk and this can mean huge gains or massive losses depending on how you read the markets.
A bank deposit cannot depreciate in value and so they are virtually risk-free (Unless the bank goes under), and so the investors money is safe. The interest rate may for that bank deposit, but this will only mean less returns, not lost capital. Inflation does have an affect on bank deposits since 100 dollars today may not be worth 100 dollars tomorrow.
Gilt-edged securities can fall in value but they also come with a certain amount of guarantee to pay a fixed amount called the coupon (Gilts are bonds issued by national governments and firms)
Ordinary shares (allows you to own a part of a corporations profits) carry more risks like falling prices and dividend yields. This could be due to company profits falling meaning your share price may be worth less than you bought it for. This may lead to you not getting the usual annual returns for your shares.
Equities are a good bet against inflation but they carry a large risk and market volatility since the future price is very dependent on world market, company ality, current business owners, rising cost of sales and government policies.
Investor decision making
So all assets have varying degrees of risk with some having better returns than others. The risk and return of all these investment types are very much related, this is the foundation for investor decision making. The question becomes how much of my income should I risk for an uncertain return, and how much should I risk for a solid and safe return?
The relationship between risk and return is a certain one, Government bonds yield more than bank deposits and a share can yield more than both. Imaging buying a small company who have just listed on the stock market for 400 cents a share only to have that same price climb to over 20,000 cents per share. This would mean your shares have risen handsomely and that same return could never be achieved in a bank.
The important thing to do is to get a financial adviser who may be referred to you by a friend. They would need to look at your individual risk portfolio and give you a good plan that can balance out the "Risk and Returns" safely.