There was a time when trading on an exchange, especially a commodities exchange, meant a physical exchange trading floor, which was often a loud, chaotic, high-energy environment that not a lot of people could have access to or even understand.
The world of investment at this time was shrouded in a lot of mystery, moved slower and was certainly a lot more exclusive.
Access to markets and opportunities at the time was determined by levels of intermediaries, and being able to quantify risk and reward was a tall order that could be deciphered by few true experts.
The digital age brought about a lot of changes in the world of investments, opening up opportunities to a wider group of individuals, but this, of course, meant that some new investors were able to participate despite not having a good understanding of risk.
Different investments carry varying degrees of risk, and by understanding risk and making decisions based on that knowledge, investors are better able to make the best decisions for their portfolios and eventual finances.
Most investments are already codified at different levels on the basis of the relationships or trade-offs that can be made between safety, potential for returns, and the liquidity of the platform or asset. Investors need to be able to know and be honest enough to align their choice of a particular investment with their financial goals, risk tolerance, and the time horizon that they can afford to leave their committed money alone for.
Considering this, investments can be:
These risk categories can be identified among different asset classes; for instance, treasury bonds and money market funds are often inherently low risk, while growth stocks and Real Estate Investment Trust (REITs) are often high risk. However, even within asset classes, it is useful to consider the instrument. The commodities market, for instance, has examples at each risk level:
Luckily, alongside opening up the investment landscape for a lot more people to participate, the digital age has also opened a lot of opportunities to learn about a product prior to making a decision. So, alongside the great advice to diversify your portfolio, being intentional about researching and understanding an investment before committing is another great move to manage investment risk today.
Here are a couple of things to ask and find out for yourself:
Understanding and managing risks make you a more confident investor over time, allowing you to take advantage of opportunities when they arise. Digital trading and investment platforms today often have a treasure trove of information and reports that can help anyone answer these questions and grow their understanding of the particular asset class as they continue to explore and improve their investment profile