Stock Market Basics - Risk vs Return

As your learn the stock market basics you will need to make sure your understand the basics of what is Risk vs Return theory.

The risk of owning a stock which may or may not do well can be quite a handful. However if you play your cards well the returns will be greater. Let me give you an example in the case of the bonds let us say a company will say they will pay oout 7% interest on the bonds. That means you are now bound to earn 7% annualy on your investment whatever may be the state of the economy or the company.

However let us say if you buy a stock which does not give out any dividends but you still go ahead and buy the stocks. This stock will be with you let us say for a few years. These years may see the economy in general go up and then down. But the fact is that the stocks can average 10-12% over a period of few years. Yes, that is correct but in may so happen that the company goes bankrupt or goes into serious problems and not able to recover such that you will ultimately have to sell at a loss or hold the shares in the hope of the rebound of the company's fortune. What that menas that you carry the risk of the losses and it may so happen that you lose all your money however you will make much more money in case of the company doing well.

As a stock market basic rule the higher the risk higher the return but in turn the higher return may not always be true but also can be likely high losses.

The trade off of risk vs return is everywhere and as they say stock market is not for the faint hearted . You should have appetite for risk and stomach for riding over the losses for longer periods of time till the tide turns and you rake in huge abnormal profits.

That means what is the time horizon for your investment and for a short term player the appetite for risk should be larger than the appetite for risk for long term players. I will detail in another session of the stock market basics what is short term versus long term investments.