What is Risk and Return?

Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our word of the day is “Risk and Return”
When it comes to financial matters, we all know what risk is -- the possibility of losing your hard-earned cash. And most of us understand that a return is what you make on an investment. What many people don't understand, though, is the relationship between the two.
The relationship between risk and return is often represented by a trade-off. In general, the more risk you take on, the greater your possible return. Think of lottery tickets, for example. They involve a very high risk and the possibility of an extremely high reward. Or penny stocks: They're also very risky and yet seem full of amazing potential.
At the other end of the spectrum are options such as a savings account at your bank, or buying government bonds. They're quite low-risk, but you're not going to make a mint on them, either -- at least not these days, with interest rates so low.
Risk and return play a part in our nonfinancial lives, as well. Think of that lovely person you'd like to date, for example. Asking him or her out involves the risk of being turned down or embarrassed. But the possible return is significant, too, if you end up in a meaningful relationship.
The principle even applies at restaurants. Take a chance on a menu item you've never tried and can't pronounce instead of your safe and boring usual order. It's riskier, but you might discover a new favorite.

By Barry Norman, Investors Trading Academy