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What are Risk and Return? | Risk and Return Explained in 100 Seconds.

Imagine trying to pet a crocodile. Kind of risky, right? But if you survive it, you might become rich and famous. Investing works the same way: You must take risks if you want to make returns. In life and in investing, risk and return are two sides of the same coin. But here is the catch: Taking on risks doesn’t guarantee returns. I am sure there are tons of people who tried to pet crocodiles but didn’t get their fair share of return. In investing a good example for this is the S&P 500 index, a basket of the 500 largest stocks in the US. Between 2000 and 2009 the index produced no significant returns for investors. However, during this time there was no shortage of risks. Just remember the Dot-Com Bubble, the 9/11 Attacks or the global financial crisis. On the flipside, there is no such thing as a free lunch. With other words: high returns always come along with high risks. Hence, if someone promises you sky high returns without any risks, be skeptical. If it sounds too good to be true, it probably is. Risk often lurks in the most unlikely places and can strike you when you expect it the least. There are many ways to classify risks and returns. The simplest one is to break each of them into two groups: Let’s start with returns: Investments can provide returns in form of price increases. For example, the price of a stock or bond could grow from 100 to 105 dollar. But investments can also provide returns in form of income. For example, a stock could pay 3 dollars in dividends and a bond 3 dollar in interest. As for risks, they can be temporary or permanent. If an investment drops from 100 to 95 dollar, that’s a temporary loss because the price might recover. But if you sell at 95 dollars, that’s a permanent loss – the money’s gone for good. To sum up everything: Risk and return are the two major pillars of investing. Successful investing is all about the management of risks, not the management of returns. This has been Risk and Return in 100 seconds. Hit the Like-button and subscribe if you want to see more short videos like this. Thanks for watching and I will see you in the next one. --- Sources: https://wealth.amg.com/blog/the-lost-... --- #investing #investment #investingtips #investingforbeginners #stocks #stockmarket #risk #return #riskvsreward