Financial Investment Risk and Return Investing

By: Dave Saltonstall

Financial Investment Risk and Return Investing today may seem daunting. However, there are some basic rules for investors that have not changed, even in the current market turmoil.
The two basic rules that investors should always remember are that every investment has risks, and that investments with higher returns usually have higher risks. How can an investor know the amount of risk involved with a particular investment? The following guidelines should help. Money market funds are the safest investments that you can make because the risk that you will lose money is small, although there is still some risk. Money market funds also pay lower returns than most other investments. The trade off here is that, by keeping your money safe, you earn little on your investment. If your tolerance for risk is low then money market funds may be the right investment for you

Bonds, such as; commercial or performance bonds are a riskier investment than money market funds, but bonds also pay higher returns. With bonds the risk is that the bond issuer will default, and you as an investor will lose your money. Bond defaults do happen, but they are not common, and you can work to avoid these by checking on bond ratings with an independent rating agency before you invest.

The return you earn for investing in bonds is an interest rate stated on the face of the bond. In addition, bonds can increase or decrease in value when interest rates change. Stocks are riskier than either money market funds or bonds. When you invest in stock you are actually buying a share of the ownership in a company. How much your stock is worth depends on how well that company does. If the company goes bankrupt you will lose your entire investment. However, if the company does well then the value of your stock could increase dramatically. Investors who can tolerate a lot of risk can make a lot of money investing in stocks.

The guidelines above are fairly broad, but they still do not cover nearly all of the investment options available to investors today. Here, then, is one final guideline for investors: If you do not understand an investment, then do not put your money in it. Investments that you do not understand carry risks that you cannot understand. Never put your money in any investment without first knowing the risk that you are taking.

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