Familiarity with the concept of risk and return and its role in investment decisions
In previous lessons, while introducing the history of the stock market in the world, we explained in detail the benefits of investing in the stock market. It was also said that in the stock exchange, a type of asset called financial assets or so-called paper assets is traded. These financial assets include stocks, equity securities and other types of securities. It was also pointed out that the value of a financial asset is backed by another asset. For example, the value of a company’s stock depends on the company’s performance, and as the company’s performance improves or weakens, its stock value goes up and down.
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Therefore, in choosing a financial asset such as stocks, it is very important to pay attention to the information that can affect the price of that asset. Because decision making based on information can greatly reduce your investment risk. But what do you think is the risk and how can we reduce the risk of investing in the stock market?
In a very simple definition, risk is the probability that predictions will not come true. For example, suppose that the stock price of Company A is currently 150 Tomans. You predict that the stock price of this company will reach 160 Tomans next month, and based on this forecast, you will buy shares. There are two possible scenarios. Either the mentioned stock will reach 160 Tomans or more next month, in which case you have successfully passed the investment risk and your so-called investment risk is zero, or your prediction will not come true. And that company’s stock is selling at a lower price than you expected. For example, next month the price of the mentioned shares will reach 155 Tomans. In this case, your prediction has been associated with 50% failure.
Thus, it is clear that another definition of risk is the probability of failure. The higher the probability of failure in investing, the higher the so-called investment risk. Therefore, by paying attention to the concept of risk, we can understand two basic points
1. Accurate forecasting plays a huge role in reducing investment risk
2- The need for the ability to accept risk by shareholders
Of course, in the future, we will tell you that in recent years, with the design of some methods of investing in the stock market, the possibility of risk-free investment in the stock market has also been provided for individuals. However, we must keep in mind that the issue of risk should always be considered in investments.
But in addition to the concept of risk, another concept is always used in the investment literature. A concept called returns.
Return on investment
Yield refers to the return on investment. In previous lessons, we explained that the person who buys a stock earns money from two places. The first is the receipt of annual cash dividends and the second is revenue from rising stock prices. Taken together, these two are called returns.
For example, suppose a person buys the company’s stock for 150 tomans. If this company distributes 15 Tomans of cash dividend to its shareholders at the end of the year and the share price reaches 195 Tomans at the end of the year, then the individual return on investment has been 40%.
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