Risk: Understanding risk and the different types of risk

[Soultrader 12]

Any form of investment, you must first consider risk. Thinking of only profits in the beginning is an amateur way of thinking.

 

Let's go over a few examples or risk.

 

1. Inflationary risk: inflation will erode your purchasing power. You need to beat inflation to actually make money. Typical inflation is 3-5%.

 

2. Business risk: initial investment in a company. This is a high risk = high reward risk but you need to be aware that you may lose your entire investment. Also, if you borrowed money you can find yourself in a tremendous debt.

 

3. Timing risk: timing is also important in any investment you make. For example, if you bought a house at the peak of a economic cycle you are paying alot more than you can several years down the line. If you sell a stock just before it becomes a 10 bagger, this is a lost opportunity.

 

4. Market risk: The global economy is vast and unpredictable. Your investment in China can be eliminated due to goverment policies, your 401k plan may disappear due to a bear market. All of these uncertainties are market risks.

 

Always put risk capital aside from living expenses. If you are investing with your kid's college fund, that is a bad idea. If you are investing with your life savings, that is not a good idea. Always have a strategy and never let some financial expert manage your money blindly. Research and do your homework first. I know too many people who know nothing about the financial markets buying stocks because of a phone call from a broker. Avoid these costly mistakes!

 

Sources for mutual funds for those who are interested:

 

1. Investor's Business Daily

2. www.multex.com

3. Morningstar: Stocks, Mutual Funds, Investing and Personal Finance

4. Value Line Home Page

5. VectorVest - The Intelligent Way to Manage Your Portfolio

[Viety Cent 10]

thanks for tips never knew investment would be so risky

 

i would think youd get lucky thats all

[carter 10]

thanks for tips never knew investment would be so risky

 

i would think youd get lucky thats all

 

Scary isnt it?

[tab321 10]

Risk is the main thing to watch

[Trade Up 10]

Risk AND reward are the main factors you should consider when investing.

 

When you breakdown a traders "gut" feeling for a trade, it is amazing how many factors really come into play. You could find the best stock in the world, trading well, profits on the up, but if the market is collapsing - whats the point of investing?

 

Its like swimming against the ocean - tiring, and ultimately you will lose.