6-2 Journal - Risk & Return in Investing - MD

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Jan 9, 2024

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Mariana Ducharme Southern New Hampshire University FIN 320 – Principles of Finance Lori Lothringer August 2023 FIN 320 – Principles of Finance - Module Six Journal: Risk & Return in Investing Investment Risk Many factors can be considered to determine investment risks. The major key risks associated with investing in the stock market are Systematic Risk or Market Risk; Unsystematic Risk; Inflation Risk; Liquidity Risk; Volatility Risk, and Currency Risk, (One, n.d.). Systematic or Market Risk are risks associated with the overall performance of the market and general economy and are usually unpredictable, it affects the entire market not only one individual company. Contrary to systematic risk, unsystematic risk is related to one individual company, such as new competitors in the same industry or inefficient management of the company, this type of risk can be more predictable and can be minimized. Inflation risk is common in all types of investments, it is the risk that an investment may lose its value in the future due to a decline in purchasing power (usually because of inflation). Liquidity Risk is when the investment can’t be sold or purchased quickly. Volatility risk happens due to price fluctuations over a period. Last, currency risk is a risk of loss that may happen due to the fluctuation of foreign rates, (Beattie, 2011). Investment Return Many factors can cause a company’s stock or investment to increase or decrease its value. Certain reasons can affect the company’s performance and decrease stock price entirely,

such as poor management, changes in capital structure, labor strikes, new competitors in the same industry, company scandals, price fluctuations and instability, poor liquidity, etc., (Harper, 2004). A few factors that can increase stock price and investment are new product releases, industry performance, forecast of estimated earnings, investors’ sentiment, and higher demand (if more people buy stock, the price goes up – if more people sell the stock, the price goes down), stock repurchase, organizational restructuring of the company, etc., (Biostrategy Analytics, 2013). Risk-Return Relationship Risk and return are correlated. High risk corresponds to increased returns; however, it is important to remember that high risk can also bring potential loss and no revenue on some occasions. Every investment has different risks and returns, investors must understand how they can access their money when they need it, how fast they can grow, and to maintain it safely, (U.S. Securities and Exchange Commission, n.d.). The relationship between risk and return is very simple to understand, the risk in investing in an industry/investment is proportional to the returns. In this case, by selecting a high-risk investment, the investor will likely obtain higher profits – while investing in a low-risk investment will cause low returns. A good example of this relationship is the fact that many people are selling their shares to make profits due to the actual economic recession in the market. However, in the long run, the market will likely increase again, investors can buy low and sell high. Of course, analysis of the market and planning are necessary in this scenario. Shares are a classic example of this relationship because the value of shares changes by the minute, which can lead to a high return or loss of the investment. To avoid high risk, an investor could potentially invest in bonds instead

of stocks, the risks are generally lower with bonds because bonds do not have as much fluctuation as stocks. Reflection I do not hold any investments in stocks, bonds, equity, savings, etc. However, this is something I have been considering for a while and doing some research. I do have some amount saved and I would like to invest in a long-term investment. My husband does have shares such as Bitcoin and we have been discussing a few options. After what I have learned and analyzed about financial investment and management, I think treasury bonds or equity would be a great choice for me. Due to the high fluctuation of stock shares, I consider it a high-risk investment for me. I feel more comfortable with a low-risk, long-term investment since I do not need to generate any profit in a short period of time. At this moment, I am interested in purchasing bonds or assets such as real property in a location where I have been observing and I know the market price will increase soon. When it comes to presenting stock investment to a company, I feel I need to do more research and analysis of the market to understand the industry trends and investment aspects such as portfolio, competitors, investors' sentiment, demands, etc.

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References Beattie, A. (2011, September 20). 10 Risks That Every Stock Faces . Investopedia; Investopedia. https://www.investopedia.com/articles/stocks/11/risks-every-stock-faces.asp Biostrategy Analytics. (2013, August 28). 5 Ways to Boost Your Company’s Stock Price – Biostrategy Analytics . Biostrategy Analytics; https://www.facebook.com/WordPresscom. https://biostrategyanalytics.com/2013/08/28/5-ways-to-boost-your-companys-stock-price/ Harper, D. R. (2004, October 5). Factors That Move Stock Prices Up and Down . Investopedia; Investopedia. https://www.investopedia.com/articles/basics/04/100804.asp One, A. (n.d.). Key Risks in Investing in Stock Market | Angel One . Angel One; Angel One. Retrieved July 31, 2023, from https://www.angelone.in/knowledge-center/share-market/key-risks-in-investing-in-stock- market U.S. Securities and Exchange Commission. (n.d.). Risk and return | Investor.gov . Home | Investor.Gov. Retrieved July 31, 2023, from https://www.investor.gov/additional- resources/information/youth/teachers-classroom-resources/risk-and-return

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