Investing goals and risk tolerance
Understanding the risk/reward relationship and working out how much risk you are comfortable taking is an important part of investing.
As a general rule, the more risk you take the greater the potential return, but also the greater potential loss.
Before you start investing there are a few things you need to consider.
Different levels of risk
Each asset class carries a different level of risk. In order of low to high risk they are generally seen as:
Deposits with banks and building societies, governments and large corporations. May also include investments with more risk (and return) than standard bank deposits.
Also known as bonds – think of them as an IOU to a company or government. In return for lending your cash to these companies or governments for a fixed period of time, the issuer promises to make regular interest payments.
The most familiar notion of investing in property is through home ownership or buy-to-let. However there is another way to access the market – through funds that invest directly in commercial property, retail premises and offices or by investing in the shares of property companies.
‘Equities’ are simply another term for shares. The investor has a share in the ownership of a limited company listed on a stock exchange. Investors choose equity investment in the hope that the value of their shares will increase over time, providing long-term capital growth.
Spreading risk and diversification
Investing across different asset classes helps to spread risk. This is called diversification.