Financial advisors need to understand your risk tolerance. There are several terms for this: investor profile, risk temperament, or risk profile, all of which aim to answer one fundamental question: how would you feel? About the possibility of losing some of your money?
Answering this question honestly is essential as it will guide you to suitable high return investments. Some people won’t sleep for days knowing they’ll lose 10 percent of their savings. If you are one of them, risky assets are not for you. On the other hand, those looking forward to the ups and downs on the stock exchange will find a 3 percent yield on government bonds boring.
There are several classifications of risk tolerance: there are simpler models with just three categories (conservative, moderate and aggressive), but other types work with up to seven categories, ranging from very defensive to very aggressive. You can find many tolerance calculators on the internet. You can own a stake in a company or a mutual fund when you buy stocks. Your rights depend on the type of stock you buy: common, store, or preferred. Common stocks produce income in the form of dividends. Preferred stocks have fixed rewards, which is why the select stock price grows more slowly.
Stocks and bonds are loans to the issuer. The issuer undertakes to repay the principal with interest. Anyone who buys government bonds is lending money to the federal government with a guaranteed return. You cannot make as much profit from bonds as you can from stocks because there is no risk of losing your original investment. Mutual funds use your money to invest in other companies. When you own shares in a mutual fund, you essentially own fractional shares in various companies.
Mutual funds are generally classified by market sector: healthcare, transportation, etc. Each investment has its risk factor. In general, those opportunities that are not risky do not earn much, and vice versa: if you decide to buy high-risk stocks, you can make more. But of course, there is a possibility of losing some money. Experts generally advise newcomers to build a diversified portfolio, with some very safe government bonds but also some risky stocks.
