7.2.2 Investment characteristics: risk

Risk is the amount of uncertainty about what you'll get back from an investment. It means the possibility that the investment may not make money, or that you could lose some or all of the money you invest.

Risky investments move much more than stable, low-risk ones.


Risk is based on several factors:

Every type of investment has risks, and some risks are easier to understand than others. Experts use many different ways to analyze risk, and can spend time carefully evaluating a business. Unless you are a knowledgeable investor, you should get advice from a financial planner or advisor for any investments beyond simple ones such as term deposits and government savings bonds.

Risk vs. expected return

The return that an investor expects from an investment is related to its risk.

As risk rises, the expected return also rises.

When you buy a risky investment, you expect to make more money. After all, if you were going to make the same return with a low-risk investment, you would choose the less risky one. So to attract investors, risky investments have to offer the possibility of a higher return.

But high risk means you will not necessarily get the return you expected. Perhaps you will make more than you expected, perhaps less. With many investments, such as company shares, there is also a chance that you will lose some or all of the money you invested. Risk means you can't be sure what the return will be.

When the risk is low, you must be willing to accept a lower return. If someone offers you an investment that promises high returns with a low risk, don't believe it. Higher returns mean higher risk.

You have to be comfortable with the risk you take on—if you can't sleep at night because you are worrying about your investments, you may be better off with an investment that offers lower risk. Your risk tolerance is an important personal factor to think about and discuss with your investment advisor. (For more on risk tolerance, see the next section Risk and your risk tolerance and section titled Investing goals.)

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