LESSON

All investments involve various degrees of risk, as well as different kinds of risk, including the possible loss of money. Market risk is the risk that an event in any of the financial markets (such as a recession, a rise in interest rates, a change in the tax laws, etc.) may lead to losses in the value of your investment. Historically, investments with a greater chance of losing value have also been those that can produce greater returns. In other words, to compensate for increasing levels of risk, an investment must offer the potential for higher earnings. So making an informed decision to assume some risk can create the opportunity for greater reward. This fundamental principle of investing is known as the risk/reward tradeoff.