Risk and return

Hi Marko, thanks for your question.

Risk and return is one of the most basic concepts in the stock market. As such, understanding of this method is an absolute priority for anyone who intends to become a trader or investor as practically everything starts and ends with the risk and return.

The risk calculates the chance of failure in reaching objectives or goals. On the other hand, the return is what you hope to get when achieving your goals. Hence, these two have correlated relations as you want to lower the risk and maximize the returns on your investment. 

For this reason, investors calculate the return on investment (ROI) to calculate the amount of return on a particular investment. This is the most basic formula to calculate the ROI:

ROI = Current Value of Investment − Cost of Investment

                                 Cost of Investment

Following types of risk can be found in the investment process:

There are a number of risks that you should consider when deciding on your investments:

Investment market risk 

Investment specific risk 

Market timing risk 

Inflation risk 

Interest rate risk 

Legislative risk 

Liquidity risk 

The risk-return ratio is measured to see how much risk you get for each dollar that you invest. For instance, you are investing $100 in an X stock. A move in stock price to $90, would lose you $10. On the other hand, you would be happy to close the trade if the stock price reaches $120. Hence, your R:R is 1:2 as you are risking $10 to make $20.