By Connor Holton
Risk Versus Reward: An Overview
Risk/Reward ratios are calculated by a scale of 2:1, 1 being your original investment. Only when the payoff is twice as much as you put in, should you be interested in the investment. For example, if you pay out $25 and expect to receive $50, that is a simple 2:1 investment ratio; the reward outweighs the risk. The principle of buying and trading stocks revolves around the idea of buying while stocks are cheap, and selling them when they are expensive. It is vital to balance probability in terms of research and fact-checking the company or entity that you plan to buy stocks for. Going on the simple 2:1 investment ratio makes buying a lottery ticket seem like a great idea, with the ratio being more along the lines of 1:1,000 although probability wise, this is a bad decision. Doing research into how the company operates is a surefire way to improve the probability of making a solid investment choice.
When choosing where to buy stocks, it is important that you never put all of your resources into a single entity. By diversifying your interests you solidify the chance that you will never be without a reward. Should one industry falter, another one may prosper, and as such you haven't suffered a catastrophic loss in revenue. Diversification serves as a backup plan of sorts in regards to having multiple investments. It acts as a net to catch plummeting
401k Plans - 401k plans typically range from variable risk, to low risk. 401k's are pension accounts, used to host retirement savings.
Bonds - The interest rate risk of buying a bond varies depending on the price of the bond. Typically, the longer maturity period of a bond, the higher the risk of it dropping in price rises.
Certificates of Deposit - CD's have set maturity dates and interest rates, making them very dependable and very low risk. These certificates are mainly used to help on a major purchase, rather than for an emergency fund.
Corporate Bond - A corporate bond is a debt security issued by corporations and sold to investors as a form of confidence. The backing for the bond is typically representative of the payment ability of the company, which is normally money which is predicted to be earned. When corporations successfully pay these bonds off, they ensure confidence to continue buying these bonds. Depending on the company, these bonds have a variable risk. For an established company, such as Apple or Microsoft, the risk is low. But, for a non-established company, the risk is high.
Municipal Bond - A municipal bond is a form of debt security which is issued by a state or county to finance itself. These bonds are tax-exempt, and usually used by the wealthy, as well as being low risk.
Money Market Mutual Funds - Money market mutual funds are investments whose objectives are to earn interest for shareholders while maintaining a set value, usually of 1 dollar. These investments are usually short-term, under a year's worth of time. Money market funds are normally liquid assets as well. They are low risk, but low return as well.
Junk Bonds - Junk bond is a term used for any kind of bond which has a very high risk factor, and a variable reward factor. Junk bonds typically aren't as trusted or used as normal investment-grade bonds.
Government Savings Bonds - Savings bonds offer fixed interests rates over a set period of time. These bonds aren't subject to local and state taxes as well, and are low risk and medium reward.
Treasury Notes and Bonds - A treasury note is a form of debt security with a fixed interest rate with a maturity period between 1 and 10 years. These notes and bonds allow for the investor to specify the desired amount, though it may not be approved. These bonds are medium risk and medium reward.
Treasury Bills - Treasury bills, otherwise known as T-Bills, are short term debt obligations which are sold in quantities of $1,000 to $5,000,000, and have maturity periods which range from four to twenty six weeks, depending on the size of the denomination. The risk/reward factor for the kind of bill is variable.
Equity - Equities are the value given to the shares of a company. Much like a corporate bond, equities' value depends on how the company is faring at the moment, with established companies having low risk factors, and non-established companies having high risk factors.
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