Picking A Risk-Free Stock Investment

Picking a risk-free stock investment is not possible because all stock investment carry a degree of risk. At the very least, the decision to make an investment means that you have foregone an opportunity to use the money for another purpose. This is known as opportunity cost, which is a form of risk taken by an investor.

If you choose to invest in bonds, your risks are lower than investing in stocks but you are subject to the credit and default risk of the issuer. Certain types of stocks carry more risks than others. For example, utility stocks, which pay high earnings, and act more like bonds, carry credit risk. Money market instruments that are considered riskless, carry inflation or purchasing power risk. This is the risk that the return on the investment is less than what the going rate of inflation is, causing your money to lose purchasing power.

Here are a couple of steps when looking for risk-free investment tools:

Step 1: Understand Risk Tolerance
Because investing in stocks involves a degree of risk, you should understand what your personal tolerance for risk is. Risk tolerance is built on a belief that the higher the return you seek for a given investment, the higher the risk you must be willing to take on.

Risk is ranked on a risk tolerance pyramid. Cash and money market instruments such as certificates of deposits and treasury bills are considered to have the lowest amount of associated risk, although we mentioned purchasing power risk. Bonds are a level higher than cash and money market instruments and involve credit risks. Stocks are at the top of the pyramid and are subject to market risk. An individual investor’s risk profile can range from low, which is risk adverse and should not be investing in stocks, to high and aggressive, which is an investor that is involved in exotic and risky speculative stocks. Knowing your risk tolerance will help you understand where you rank and give you an ideal of which investments are suitable for you.

Step 2: Choose Appropriate Investments
An individual investor who understands their risk tolerance can use that information to choose appropriate stock investments. For an investor looking for growth and is not concerned about income, growth stocks such as those associated with technology companies may be appropriate. An investor that seeks value and income looks to buy blue chip stocks and stock of companies that are more stable.

Be careful when dealing with individuals who promise high rates of return, with little or no risk to you. This is an invitation to fraud or a return guarantee, both that violates security laws. Understanding your risk tolerance and choosing investments that are within an acceptable risk range are the best way to minimize risks associated with investing in stock.

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