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Risk and reward.

We'd all like our money to grow substantially without risking our original investment amount. Unfortunately, this isn't possible.

Almost all investment involves some degree of risk. What's important is that you understand and are comfortable with the risks you're taking before you choose to invest.

What is risk?

Investment risk is the chance that your money will not perform in the way you want or need it to. For example, you invest in shares or units trusts aiming for growth but your investment loses value and when you cash-in, you get back less than you originally invested.

What is reward?

Investment reward is when your money does at least what you expect it to. For example, you make an investment aiming for growth and when you cash in, you get back more than you originally invested.

Higher risk often offers the potential for higher rewards, but it also comes with a greater chance of you losing money.

Lower risk normally has a smaller chance of loss, but the growth of your money will usually be less.

If you put your money in a bank account there's only a small risk, but the interest you'll get – your 'reward', will probably be quite low.

On the other hand, investing your money in a single company's shares is high risk, as your returns are dependent on that one company. If something happens to that company, it will change the value of your shares and in the worst case, you could lose all your money. However, your reward could be much greater than in a bank account if the company's shares perform well.

Can I reduce my investment risk?

You can't get rid of risk completely, but it's possible to manage it so that you improve the chances of making a reasonable return.

Spreading your investment risk
You can reduce risk by putting your money in different types of investment with varying levels of risk, for example, company shares, fixed interest securities, property and cash. These types of investment are known as investment assets.

Pooling your investments
This is where you buy into funds and your money's invested with thousands of other people's money into a wide range of company shares.

Although less risky than individual company investments, if the stock market as a whole is falling in value, your pooled investment will probably also fall in value.

As well as investing in shares, pooled investment funds can also be:

  • Fixed interest securities (such as corporate bonds, government bonds, or both).
  • Property.
  • A mixture of company shares, fixed interest securities, property and cash.

However you choose to invest, saving your money in a range of assets means that, if something happens to one of your investments, your overall loss is reduced as it's balanced out by your other investments.

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