Investing in Stocks and Risk-Return Relationship

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Investing in Stocks and Risk-Return Relationship

Introduction

The market is designed in such a way that any financial investment is accompanied by a number of risks influenced by various factors. Usually, there is a direct relationship; the more investments the greater the potential profit and risks. The most profitable and balanced decision always requires a thorough analysis of the market and the stability of the financial position of the investor.

Key Risks and Events Associated with Investing in Stocks

The investor can suffer losses due to general indicators of financial markets, for example, stock market bubbles and crashes. It regularly happens in connection with the valuation of assets at their real worth. All unnecessary things leave the market for further healthy growth. The further such cleaning is delayed for various reasons, the more complicated and longer it usually takes. Another problem for an investor is inflation risk, also called purchasing power risk. It happens when todays investment will not be worth the same in the future due to changes in the value of cash flows. It can happen in a country with financial instability experiencing a sharp currency collapse during the crisis. Liquidity risk arises when there is a need to buy or sell an investment to prevent or minimize a loss, but this cannot be done quickly and efficiently enough (Marar & Nabanee, 2020). This risk usually happens due to stagnation and congestion of the market system and can be reduced by expanding production and reorienting sales markets.

The Risk and Return Relationship

The concept of risk and return shows the correlation between investing in a business to produce profit and the prospect of financial loss. It is impracticable to make a profit from investing in stocks without at least minimal risks. The stock market is a notably volatile area with a wide range of value changes (Breiki & Nobanee, 2019). It is not rare in history when, despite good forecasts, the stock market crashed sharply, for example, on Black Monday in 1987, when the overall index fell 28.5% (Breiki & Nobanee, 2019). The American stock market has been swept by a wave of chaos and massive sell-off in stocks.

My Personal Stock-Investment Decisions and Decisions for a Business

I have not thought about personal investments in the stocks market yet, but I do not exclude such a possibility. Firstly, I would prefer to get a competent profile education in this area, achieve absolute financial stability, accumulate a decent amount of money, and start with a small investment. I will try to make informed decisions based on pure statistics and stop rash risks. In the case of a business, the size of the company and the staff of analysts strongly influence the strategy and scope of work. Large investments require massive financial investments and a more detailed analysis of the market for competitiveness. This is followed by a great responsibility not only to oneself but also to employees and partners. The final decision from the management makes a major difference and influences the whole process.

Conclusion

The trade-off between risk and return depends on many external and internal factors that need to be analyzed in advance. The most profitable decision requires a detailed forecast of all favorable and unenthusiastic outcomes of investments and events. Some external factors and risks cannot be influenced except to drawing up a valid emergency plan and preparing a decent financial airbag.

References

Al Breiki, M. & Nobanee, H. (2019). The Role of Financial Management in Promoting Sustainable Business Practices and Development. Web.

Al Marar, F. & Nobanee, H. (2020). Sustainability and Risk: A Mini-Review. Web.

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