Know about risk and the types of investment

by Smita Mohta on Basic Finance, Investing Basics
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–2 minutes read–

Investments form a very important aspect in today’s world. Investments are made to accomplish future goals. Investments give us a sense of security in terms of our future expenses. Investments in old times were a tool for the rich.

Investments are now viewed as instruments which can be customised to match an individual requirement and capacity. The investor should carefully access the risk reward ratio before selecting the investments.

Investments itself can be viewed from a variety of forms namely- stock markets, real estate, commodities, antiques etc. To know about these investments it is important to understand about the basics of financial markets. Investments can be for different times and for different age group requirements.

All the forms of investments carry their own risk and rewards which must be understood properly to achieve the right purpose of investments. The management of risk is very vital in investments because this is an important factor which can work against the investor.

We will categorise investments in three types- safe investments, moderately risky investments and risky investments:

Safe Investments

Safe Investments refers to the investments which are emphasised on protecting the capital to a large extent and also are comparatively liquid investments compared to others. These investments also protects from the risk of uncertain volatility and other changes which might erode the capital of the investor. These types of investments carry very little or effectively no risk and hence is preferred for those who are highly risk averse individuals. Risk averse investors tries to minimize their losses more than earn huge returns and hence these investment options fulfil their needs. These types of investments include

  • Bank Savings Account
  • Certificate of Deposits
  • Treasury Securities
  • Stable Value Funds
  • Fixed Annuities
  • Government backed securities
  • Short term Corporate Bonds etc.

Investments (1)

These types of investments which carry negligible or minimal risk also have limited rewards i.e. since their risk is minimal and hence the reward ratio also is in a similar way.

Moderate Risk Investments

These are investment which carries risk more than the safe investment bets but the rewards generated compensates the investors for the extra amount of risk being taken by them. These type of investments are for individuals are a little less risk averse than the safe investors i.e., they tend to take a little more risk if they get compensated for the amount of risk being taken. These type of investment include

  • Preferred stocks
  • Dividend paying stocks
  • Bonds
  • Mutual funds
  • Exchange traded funds etc.

Investments 1

Risky Investments

These are investments which carry substantial amount of risk as compared with other type of investments. These investments are for individuals who are risk seekers i.e. they take risky bets in their investments. These investors if has a view for a long term then can create wealth, but sometimes even these can work against their favour also. These investments carry a greater degree of risk of eroding the investor’s capital. These types of investments are generally not preferred for short term horizons. These types of investments include

  • Shares
  • High yielding bonds
  • Hedge Funds
  • Penny Stocks
  • Currencies etc

Key takeaways

  • The investors should carefully construct their portfolio with different investment options.
  • They should diversify their investments to suit their needs and fulfil their objective.
  • They should have a blend of different investments across different categories which would further help them in times of uncertainties.
  • Therefore everyone should invest keeping in view their investment goals, time horizon, risk they are willing to accept etc.

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Disclaimer

Elearnmarkets.com wants to remind you that all our content is created solely for the purpose of education. No strategy, stock, commodity, fund or any other security discussed here is any way a recommendation for trading or investing. Elearnmarkets.com will not be any way responsible for trading losses incurred by any individual or entity for trading with real money. Please take advise of certified financial advisers before trading or investing.

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