APMacro P2: PF Investment Risks


People save and invest their money to receive a return on their savings or investment. We will call any type of saving or investing an “investment.” The return is the income earned from the investment; it is usually calculated on a yearly or annual basis. That return can be stated as a percentage of the amount invested. Then it is called the annual rate of return.

Risk comes from the uncertainty about whether you will receive the promised return. The greater the risk you take with your investment, the higher the potential rate of return. Unfortunately, with more risk, it is also more likely that you will lose money. In other words, you can expect a return from taking risks with your money, but you could also take a financial loss. As with any economic decision, there is no free lunch in deciding about investments. Here are some of the risks you take when you invest your money.

Financial risk is the risk that the business or government that you have invested in will not be able to return your money—much less pay a rate of return.

Market risk is the risk that the price of an investment will go down. This doesn’t usually happen to money saved at a bank, savings and loan association, or credit union. However, the prices of stocks, bonds, and mutual funds are determined by supply and demand, and they do go down as well as up.

Liquidity is the ability to turn your money into cash or spendable funds.

Inflation can decrease the value of your investment. People invest money today in order to have that money, and more, available to spend in the future. The goal is to receive the original investment back plus a return, so that you will be able to buy more in the future.

Investment fraud occurs in securities and savings schemes that are misrepresented. In these cases, information about the investment is designed to deceive investors.

1) 21.1 Types of Investment Risks pp.142-144
2) 21.2 Pyramid of Risk and Rewards pp.145-149



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