Risk vs reward

When you save or invest money, two of the most important factors are risk and return.

The risk attached to an investment is a way of describing how likely it is to lose money. For example, a bank deposit account is a safe investment and is therefore very low risk. You could only lose money if the bank became insolvent and the government guarantee of savings up to £75,000 per person through the Financial Services Compensation Scheme was not honoured.

Buying shares in a new technology company, on the other hand, may be considered very high risk: there is a possibility that the firm’s products or services may not succeed, which could lead to losses for shareholders.

However, the potential returns for low-risk investments can be lower than for high-risk investment.

On a bank deposit account, returns – in the form of the annual interest rate – are relatively low, especially in the UK at the moment given the low Bank of England base rate.

With the new technology company example, on the other hand, whilst the value of the investment will go up and down, returns could be much higher over the longer term if the firm is a success or if it is bought by a larger rival.