How To Recognize And Avoid Risky Investments by:Steven Boaze
The patterns of any particular investment will detail the
relative risks and rewards undertaken with each investment.
Risks can be defined as "the chance or possibility of
injury, damage or loss." Risk focuses on the future and our
ability to forecast that future. In turn, the ability to
predict the future is largely dependent on what you've
learned from the past. The best you can do is to study the
record and draw on experience - your own and that of others.
On the surface, the relationship between risk and return
seems straight forward. In general, you will find that risk
and return move in the same direction. In other words, if
you accept a higher risk, it is possible to achieve higher
returns. High-risk investments invariably promise a high
return.
But equally important, where it is possible to win big, you
can lose big. And the odds are always with the "house" (the
provider of the risk-return). If all it took to create
instant wealth was assuming high risks, then you could
assure yourself of millionaire status simply by attending
the race track every day and betting all your money on the
long shots!
Avoiding Risky Investments
No other advice on investing is complete without a few
important warnings. The investment industry has its share
of unscrupulous people who, at best, will mismanage your
investment, and at worst, steal you blind.
They'll come at you with Ponzi schemes, pyramid deals, real
estate that's never been any good and never will, and
telephone offers or email offers of stock or funds or oil
leases or gems or precious metals, etc., that offer large
and easy returns with no risk.
These salespeople play on a universal desire to "get
something for nothing" and to "get rich quick." Most of us
are not immune to a good pitch. However, by just taking the
simple precaution of thoroughly investigating an investment
offer yourself or through a trusted accountant, lawyer,
financial adviser, etc., you'll greatly minimize the risk.
The best caveat to bear in mind is: "if it sounds too good
to be true, it probably is."
Watch out for the Ponzi and Pyramid.
In their eagerness to make a lot of money quickly, many
people and millions of dollars every year are sucked into
Ponzi schemes and pyramid deals. In the former, expect to
lose your money, and in the latter there's a very high
probability that you're wasting time and money.
In the 1920s Charles Ponzi invented a simple, alluring
investment fraud that's still practiced today. In its
simplest form, a swift-talking promoter will ask you to
give them, say $5,000 to invest in a spectacular, usually
secret, investment to which the promoter has access. They
promise a spectacular return of, say 20 percent in three
months.
At the end of the three months, they offer to deliver
$6,000 (your investment plus your return) but suggests that
you let it all "ride" for an even better return in another
three months to six months. What you don't know is that
there is no investment. The promoter is simply gathering as
much as they can from as many suckers as they can convince.
Then they have to pay Peter, it comes from Paul.
Eventually, the promoter disappears with the bulk of the
"investment" money.
A Pyramid scheme is an illegal type of multilevel sales-
except usually there is no product sold. You are asked to
pay ($500, $1,000, $10,000 etc.) to become part of the
pyramid. The amount of your payment to the promoter
determines your position level in the pyramid and "allows"
you to promote the pyramid to others. The more people you
bring into the pyramid, the higher you rise and the closer
you get to the big payoff.
Financial Risk
For most investors, financial risk is the most immediate
one. It centers on the simple question, "If I put my money
into this investment, will I at least get my money back?"
Your best protection against financial risk is to explore
any investment to the point where you understand the
factors that risk and/or secure your principle. When you
buy a common stock, for example, the financial risk is tied
to the credit and operating histories of the company
issuing the stock.
So you analyze the firm's financial capacity (ability to
generate income). A firm that can't pay its debts or has a
low financial capacity and a comparatively high financial
risk. A company with earnings high enough to pay fixed
costs many times over is thought to pose a lower financial
risk.
Generally, such vehicles as certificates of deposit,
commercial short-term paper, federal savings bonds and
Treasury securities are considered of low financial risk.
Whenever you evaluate the risk inherent in a given
investment, ask yourself:
1. What kind of risk is involved?
2. What is the extent of this risk?
3. Is the potential return worth this risk?
By first learning a set of criteria with which you can
evaluate an investment, and then considering those
objectives in light of your personal factors, you've begun
acting like an investor.
About the author
Steven Boaze, Chairman, is The Owner of Boaze.com
Corporate Web Solutions. Steven is the Author of
two successful Books, thousands of articles featured
in radio, magazines newspapers and trade journals.
Steven has 28 years experience in journalism, copywriting,
certified Web Developer. http://www.copywriteplus.com
http://www.boaze.com Copyright 1998-2006 Boaze.com.
http://www.articlecity.com/articles/business_and_finance/article_5392.shtml Small Business Loan Proposal by:Rebecca Game Work From Home? How Do You Decide? by:Daegan Smith Selecting a Lender for Your Small Business Loan by:Rebecca Game Personal Loans UK - Enter The World Of Abundance by:Steve Clark Worry About The Surety Bond Last by:Michael Weisbrot The Basics of Real Estate Investing by:David Neese New Year's Resolutions - Executive Compensation Style by:Paul R. Dorf, Ph.D., APD Bad Credit Personal Loan - A Changed Attitude Of Lenders Towards Bad Credit by:Amanda Thopmson Internet Mortgage Leads by:Jay Conners Can You Hear Me Now? by:Rosanne D'Ausilio, Ph.D. Term Life Will Save You Money by:Kinney Dancair Document Management Service by:Jordan McCollum How To Make An Excellent Investment In Your Web Site Design by:Abe Cherian