Concepts of Return on Investment & Risk

Everyday life is full or risk. When you drive to work, you run the risk of getting plastered by an 18-wheeler, and the simple act of stepping off a curb could turn deadly if you're not careful. But to get anywhere or accomplish anything in life, you'll probably have to take at least some risk to receive a reward in return. This concept is also true when it comes to investing your hard-earned money.


Return on investment (ROI) is the amount of money you receive (or lose) in relation to the amount you invest. ROI takes into account things like interest rates, additional purchases, withdrawals and expenses when determining the overall profitability of your investment, Risk is the probability that your investment will gain or lose money. Before investing, you also need to consider your risk tolerance, which is your level of comfort with and your ability to absorb a loss if it occurs.

Higher Risk Can Mean Higher Rewards

When it comes to investing your money, the more risk you are willing to take, the better your chances of earning a high return on your money. On the other hand, there's also a greater chance that your investment will crash and burn. High-risk investment products like penny stocks, aggressive growth mutual funds and foreign company stocks tend to be more volatile because of their speculative nature. For instance, a stock investment in a company located in a country with an unstable government could go south quickly if the regime changes.

Lower Risk Means More Safety

Low-risk investments offer a larger degree of safety. If you put your money into a savings account at your local bank, you can take comfort knowing that your money is insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Of course, in exchange for the safety you'll receive a minuscule interest rate, meaning your return on investment over time will also be small.

Risk Aversion

You could always decide to avoid risk at all by keeping your money in your piggy bank or under your mattress. While your money is completely safe, unless a burglar steals your piggy bank or you accidentally set the mattress on fire, your return on investment will be zero. You may also have great difficulty in achieving financial goals like having enough money for retirement or for your kids' college education.


About the Author

Chris Joseph writes for newspapers and online publications, covering business, technology, health, fitness and sports. He holds a Bachelor of Science in marketing from York College of Pennsylvania.