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Risk and Return
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Risk and return
For some people, keeping their money in a safe environment isn’t the most important factor. Instead, they are willing to take a few risks and try to make as much money as they can, in the shortest time possible.
They do this by ‘investing’ their money. An investment can be defined as the money that someone has put into a company, business, bank, or object in order to make a profit.
Investments can come in the form of interest earned from savings, a share in a company or business, or from an object such as a house or antiques. In other words, it is something that may increase in value over time. However, savings in a bank or building society account are rarely defined as an investment, but as savings.
The main points to consider when thinking about investing your money are what risks are involved, and what kind of return are you likely to see. The idea is to get as much return as you possibly can, with as little risk as possible.
With many investments, the risk is whether you are likely to get back as much money as you originally put in. The ‘return’ is the amount that you will get back from the amount that you had invested. If the investment has decreased in value, then you have made no return on your original investment.
There are many types of risks that your investment could be susceptible to. Here are the main types:
Capital risk - Your savings or investments are could fall in value.
Interest rate risk - The interest rate you get may not be such good value in future years.
Inflation risk - Price levels will rise, so the buying power of your investment will fall.
You need to make sure that you are aware of all of the risks involved before you go ahead with any kind of investment. Most investments are not designed to make you rich over night, and will require you to keep investing with them for around five to fifteen years as a minimum.
The general rule is that the higher the return, the more risk is involved. So if something seems too good to be true, it probably is.
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