Risk and return |

Why is it a risk to invest money in the stock market?

Video Why is it a risk to invest money in the stock market?

students should understand that each savings and investment product has different risks and returns. differences include how quickly investors can get their money when they need it, how quickly their money will grow, and how safe their money will be.

saving products

Savings accounts, insured money market accounts, and CDs are considered very safe because they are insured by the federal government. you can easily get money in savings if you need it for any reason. but there is a trade-off for security and immediate availability. the interest rate on savings is generally lower compared to investments.

While safe, savings are not without risk: The risk is that the low interest rate you receive won’t keep pace with inflation. For example, with inflation, a candy bar that costs one dollar today could cost two dollars ten years from now. If your money doesn’t grow as fast as inflation does, it’s like losing money, because while a dollar buys a candy bar today, in ten years it may only buy half of one.

investment products

Stocks, bonds, and mutual funds are the most common investment products. all have higher risks and potentially higher returns than savings products. For many decades, the investment that has provided the highest average rate of return has been stocks. But there are no guarantees of profit when you buy stocks, which makes stocks one of the riskiest investments. If a company doesn’t do well or falls out of favor with investors, its stock may drop in price and investors could lose money.

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You can earn money in two ways if you own shares. First, the share price can go up if the company is doing well; the increase is called capital gain or appreciation. Second, companies sometimes pay a portion of profits to shareholders, with a payment called a dividend.

Bonds generally offer higher returns with higher risk than savings and lower returns than stocks. But the bond issuer’s promise to pay the principal generally makes bonds less risky than stocks. Unlike shareholders, bondholders know how much money they expect to receive, unless the issuer of the bond goes bankrupt or goes out of business. in that case, bondholders stand to lose money. but if there is money left over, corporate bondholders will get it before shareholders.

The risk of investing in mutual funds is determined by the underlying risks of the stocks, bonds and other investments held by the fund. no mutual fund can guarantee its returns, and no mutual fund is risk-free.

always remember: the higher the potential return, the higher the risk. protection against risk is time, and that is what young people have. On any given day the stock market can go up or down. sometimes it goes down for months or years. But over the years, investors who have taken a “buy and hold” approach to investing tend to get ahead of those trying to time the market.

suggested activities for students

  • Now that students understand the concept of risk, how they would invest their money and why.
  • If students have already selected a stock they are following, ask them to graph how the action has performed for the last two years, five years and 20 years. If an investor started with 100 shares, roughly how much money would he have now?
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