Kavan Choksi on Investing: Understanding Risk and Reward
Risk and reward are two fundamental concepts in investing – finding the right balance between the two is important for any investor's success. Kavan Choksi looks at how you can manage your portfolio risk exposures to maximize your returns.
What are risk and reward?
The term "risk" refers to the potential for an investor to suffer a loss. Simply put, the riskier an investment is, the more likely you could lose some money, notes Kavan Choksi.
Typically, growth stocks, junior companies, and other speculative investments (like financial derivatives and cryptocurrencies) are considered higher risk because they can be difficult for retail investors to understand. Or there is less information about them, making it difficult for investors to make fully informed decisions.
"Reward" refers to the return (usually in the form of dividends and capital returns) an investor receives from investing, explains Kavan Choksi. Suppose you buy $100 worth of stock. If a year later, the value of your investment has increased to $110, you have earned a "reward" of $10 (or 10%).
The two concepts are intrinsically related, says Kavan Choksi. Investors often expect a greater reward as compensation for taking on bigger risks – otherwise, why would they do it? If an investor can earn the same reward on low-risk investments such as high-risk ones, they'd always choose the low-risk option.
The main goal of any good investment strategy is to receive the maximum reward for a certain level of risk, explains Kavan Choksi. You have to decide on the amount of risk you can take on and then seek out the investments within your risk thresholds that offer the best returns.
Kavan Choksi has written and released a series of blogs on economics, finance, investing, and other related topics. Learn more about these topics by visiting this blogsite.