APMacro: PF Investing



We invest money in everything from rare coins to real estate because we expect a favorable financial return in the future. However, not all investments turn out as we hope and expect. Nearly every kind of investment involves some sort of risk. For example, the price of rare coins or houses can go down as well as up. Risk is inherent in all investments. Some risks are ones investors cannot control. Other risks can be managed. Generally, there is a strong relationship between risk and reward. The higher the potential reward an investment offers, the higher the risk of losses rather than gains. Given that relationship, there is no free lunch in investing. Investors who choose low risk may earn meager returns. Investors who seek higher returns through high-risk investments may suffer big losses. The key is to develop a risk/reward ratio with which you are comfortable. Therefore, in choosing what to invest in it is important to weigh the various risks against the potential rewards. Today, students will learn about the five types of risk, and compare the risks and rewards associated with several frequently-used investment vehicles.

Investment-Pyramid_full

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.

Arrows-02-june

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