Rate of Return and Risk

"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

Rate of Return and Risk

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.

Rate of Return and Risk
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Debentures Vs. Stocks And Bonds

A debenture is an unsecured loan you offer to a company. The company does not give any collateral for the debenture, but pays a higher rate of interest to its creditors. In case of bankruptcy or financial difficulties, the debenture holders are paid later than bondholders. Debentures are different from stocks and bonds, although all three are types of investment. Let us discuss about different types of investment options for small investors and entrepreneurs.

Debentures vs. Stocks:
When you buy stocks, you become one of the owners of the company. Your fortunes rise and fall with that of the company. If the stocks of the company soar in value, your investment pays off high dividends, but if the stocks decrease in value, the investments are low paying. Higher the risk you take, higher the rewards you get.

Stocks

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Debentures are more secure than stocks, in the sense that you are guaranteed payments with high interest rates. You are paid an interest on the money you lend the company until the maturity period, after which whatever you invested in the company is paid back to you. The interest is the profit you make from debentures. While stocks are for those who like playing the field, and are willing to take risks for the sake of high returns, debentures are for people who want a safe and secure income.

Debentures Vs. Stocks And Bonds

Debentures vs. Bonds:
Debentures and bonds are similar except for one difference - bonds are more secure than debentures. In case of both, you are paid a guaranteed interest that does not change in value irrespective of the fortunes of the company. However, bonds are more secure than debentures, but carry a lower interest rate. The company provides collateral for the loan. Moreover, in case of liquidation, bondholders will be paid off before debenture holders.

A debenture is more secure than a stock, but not as secure as a bond. In case of bankruptcy, you have no collateral you can claim from the company. To compensate for this, companies pay higher interest rates to debenture holders.

All investment, including stocks bonds or debentures carry an element of risk. If you are unsure of the investment options that are best for your business, then you can consult a small business consultant who will guide you to the best investment options available to you. Investing wisely today can pay heavy dividends tomorrow.

Debentures Vs. Stocks And Bonds

Alexander Gordon is a writer for http://www.smallbusinessconsulting.com - The Small Business Consulting Community. Sign-up for the free success steps newsletter and get our booklet valued at .95 for free as a special bonus. The newsletter provides daily strategies on starting and significantly growing a business.

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