6-1 Investing Basics – Risk vs Reward

Asset Allocation

The process of deciding how to distribute an investment portfolio among different asset classes, such as stocks, bonds, cash, and other types of investments

Capital Gain

The profit earned from the sale of an asset

Concentration Risk

The risk of significant loss due to a large portion of an investment portfolio being concentrated in a single asset, sector, or geographic area

Credit Risk

The risk that a borrower will not repay a loan or meet their debt obligations, also called default risk.

Diversification

The strategy of spreading investments across various assets, sectors, or geographic regions, to reduce risk.

Dividend Yield

The annual dividends paid by a company relative to its share price.

Inflation Risk

The risk that the value of an investment will be eroded by rising prices of goods and services.

Liquidity Risk

The risk of not being able to sell an investment quickly enough to prevent or minimize a loss.

Long-Term Capital Gains

Gains (or losses) on investments held for more than one year and are usually taxed at lower rates than short-term capital gains.

Market Risk

The risk of losing money due to factors that affect the entire market or a specific market segment, also known as systematic risk.

Portfolio Rebalancing

The periodic adjustment of an investment portfolio to maintain the desired asset allocation.

Return

The profit or loss generated by an investment over a period of time, normally expressed as a percentage.

Return on Investment (ROI)

The gain or loss generated on an investment, compared to the amount of money invested, and is normally expressed as a percentage.

Risk

The potential for financial loss or variability in returns on investments.

Risk Averse

Individuals or entities that prioritize minimizing potential losses over the possibility of achieving higher returns.

Risk Tolerant

Individuals or entities that are comfortable with the possibility of (even significant) losses and uncertain outcomes because they focus on the potential for greater rewards.

Yield

The income generated by an investment, typically expressed as a percentage of the investment's cost or current value.

Short-Term Capital Gains

Gains (or losses) on investments held for one year or less and are typically taxed at higher rates.