Equity gives great returns at a greater risk
An investor looking for greater returns is always directed to invest in equity. Since ages, it is a known fact that Equity gives higher returns in compared to many other sectors.
When invested in Blue Chips, the returns are sure and certain. Returns are even higher when the investment is made for a longer period of time.
With all these benefits comes the risk. A know fact is that investment in stock market is associated with greater volatility.
Any stock would provide dividends to the investor. When this dividend is reinvested then the returns grow at a striking rate. If a person had invested one dollar in January, 1960 then by 2010 he can expect to grow his money to $120 on the basis of total return.
If one can accept the challenges of greater risks then the money can be invested in penny stock, small cap energy stocks, ETFs which are almost at a 10 year low.
If the risk tolerance is low then one can invest in mutual funds, term deposits, low risk bonds and large dividend cap stocks.
Experts always recommend selecting a few large caps, a few mid-caps and a few small caps and even mutual funds, bonds in their portfolio to average out the risk.
Modern Portfolio Theory (MPT) suggests “volatility creates risk”. More is the chance of “lower than expected returns”, more risky the investment becomes.
The risk can be calculated in another way too. The average price of a given stock is calculated over a given period of time, greater the difference in lowest price and highest price is more risk the stock is associated with.
Equity performance and volatility are inversely proportional with each other. Better is the performance of market, lower the volatility is.
The performance of any stock doesn’t depend upon the company’s performance only. There is variety of factors associated with the performance of a stock. Any change in the national or global policy in the area of a givens stock will move the share prices up or down and this is irrespective of the individual company’s performance.
Any treaty or agreements at international level will change the face of the stock making it a either the most reliable one or the most discarded one.
Hence equity always comes with the baggage of higher returns at even greater risks.