"When everyone feels that risks are at their minimum, over-confidence can take over and elementary precautions start to get watered down." -Ian Macfarlane
The goal of investing is to create the largest rate of return for the lowest amount of risk. In theory this is straightforward and easy to understand. In practice it can be confusing. Rate of return refers to how much money you are going to get in return for your original investment. This is the most important result of investing. Rate of return is determined by the increase in asset value and any money received while holding on to that asset. Rate of return can be determined by using the following equation:
Capital Gain (gains-loss) + Cash Received (dividend or interest) / initial investment = Return Rate
Risk refers to the likelihood that you will lose your money. As an investor restricts risk, they also restrict the amount of return they can receive on their investment. Probability should play an important role in choosing your investments. Probability refers to the likelihood that something is going to happen. When looking for investment vehicles consider the probability, based on risk, that you will get your money back.
There are several low risk options which are perfect for those folks who want to invest but are not interested in high risk. The most low risk investment you can make is in U.S. Treasury Bonds, which guarantee a consistent rate of return. At the opposite end of the risk spectrum, you have high yield investments. This type of investment offers a huge rate of return, sometimes over 20%, but they also force you to risk your original capital. If things go poorly, you will lose your whole investment.
Obviously, if you want to be successful in investing you need a way to manage risk. A great way to measure the risk of a particular investment option is to look at the worst, likely, and best case outcomes. If you can live with the worst and likely outcomes then it is probably a good investment.
If you are interested in investing but overwhelmed and confused about determining risk then find yourself a local financial advisor or brokerage firm that help you determine what risk level is best for you. Another way to determine risk is to look at a stock's past performance. How a stock did in the past is a good indication of how it will do in the future.
Remember, all investing has risk associated with it. As uncertainty of success increases so does risk and potential profit. The goal of all investments is to maximize return and minimize risk.
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