Low-Risk vs High-Risk Investments: What's the difference?
Have you ever considered investing in stocks listed on the JSE? It may appear to be the best way to invest your money and turn it into a growing asset that will provide a better future for you and your family.
One of the most important factors to consider when investing in stocks is the risk of investing in a specific stock.
The topic of return on investment cannot be discussed without mentioning the risk involved in obtaining that return. Risk is absolutely essential when investing; the difficulty for new investors is determining where the risk truly lies and distinguishing between low risk and high-risk stock.
Risk is best described by volatility. Volatility is a static measure of dispersion of returns for a given stock. In most cases, the higher the volatility, the riskier the security. Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable.
Another way to think about risk is the likelihood that a particular investment or asset will suffer a permanent loss or perform below your expectations.
Unfortunately, there is no such thing as a safe JSE investment because every investment involves some level of risk. Nonetheless, there are high-risk investments and low-risk investments to consider when investing.
A high-risk investment is one that has a high percentage chance of capital loss or underperformance—or a relatively high chance of a devastating loss. Consider the following: If you were told that your investment has a 50/50 chance of earning the expected return, you might consider that quite risky.
Benefits of investing in high-risk investment:
High-risk investments can result in massive profits: Although there is always the possibility of losing money, there is also the possibility of earning larger-than-usual profits.
You are only liable to a certain extent: You can only invest with limited liability in these types of financial vehicles, which means that the amount you invested initially is the most you will ever lose in the event of liquidation.
There is a simple buying and selling procedure: Typically, you can sell it whenever you want or buy more of the same type of investment.
You make capital gains and receive dividends.
Disadvantages of investing in a high-risk investment:
These investments carry a higher level of risk: Equities, for example, are more volatile than other investment vehicles and can fluctuate erratically.
You have less control: if you buy stocks, your success is determined by whether or not the company in which you invested has excellent practices and strategies.
You are the last to be paid: If you buy stocks and the company goes bankrupt, you won't be paid until creditors, employees, suppliers, and the taxman have all been paid. You can try to get your stocks out just in time, but because stocks don't always behave consistently, forecasting their performance is difficult.
A "low-risk investment" is defined to be an investment in which there is only a small chance of losing some or all of your money. Low-risk investing, by definition, has less at stake—either in terms of the amount invested or the importance of the investment to the portfolio. There is also less to gain, either in terms of potential return or long-term benefit. Consider the following advantages and disadvantages of low-risk investments:
Benefits of investing in low-risk investments
As you may have guessed, the primary benefits of low-risk applications are their market security and high liquidity.
Another intriguing point is that, despite having characteristics very similar to savings, they end up yielding more, even with tax breaks. It is also possible to invest in lower-valued assets.
Disadvantages of investing in low-risk investments
Although profits outweigh savings, low-risk investments have much lower yields when compared to other types of investments.
As a result, if you want to increase your profits, you must venture into more risky applications.