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Risk and reward are related

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A really important principle of investing is that risk and reward are related. Reward with investing is the amount of profit you're likely to make. In most cases, as the potential reward increases, so too does the risk. Figure 1.1 shows shows the hypothetical relationship between risk and reward.


Figure 1.1: Increasing your possible reward usually means increased risk

The ‘safer’ an investment, the less risk is involved and so the less profit you can expect. I'm sure you already have a fundamental understanding of this relationship and that is why you want to get into shares. You realise that share investing involves more risk than a comparatively safe investment such as a bank deposit but the compensation for taking the higher risk is that the rewards can be greater. You also understand that you need to take the higher risk to reap the reward of a higher potential profit.

Starting With Shares

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