What is the risk of investing?

In short, risk is, in terms of an investor, the chance that an investment will result in a loss. To be more precise: Risk is the probability that the downward potential is partially used before investors can anticipate. The latter is important because if an investor knows in advance that a stock will fall, then the investor will not buy the share. The investor would try to make a profit of the downward potential of a share by, for example, buying put options or sell call options.

As mentioned, the risk is determined by the downward potential of an investment. On the other side of risk is the probability that a share rises by using the upward potential.

How to use the expected risk?

Because you can never know for sure whether a stock will rise or fall, simply because the market determines the price of a share, an investor should determine the downward and upward potential of stocks. From these expectations the investor can determine whether the investment will end in a positive or negative way. If the risk of a downward price movement is less than the probability of an upward price movement, then this will result in a the purchasing of the shares (if there are no better opportunities). Another investment product, with the share as underlying asset, can also be invested in.

It is also possible that expectations of the investor result in a net risk, the risk of a fall is considered greater than the probability of an increase. If this is the case, then the investor will ignore the share, or try on the previously described method to benefit from the share price movements.