4.1:
Risk
Sandra wants to invest her money to increase it, so she buys stocks in a company.
Sanda will make money if the company does well because her stocks will become more valuable. But if the company doesn't do well, the value of her stocks goes down, and she might lose money.
This situation shows risk in finance because there is no sure way to know if the company's stocks will go up or down.
Different risks can reduce the value of stocks.
For example, if the whole economy is doing poorly, that can decrease the stock prices of companies, not just the one Sandra invested in. That is called market risk.
However, the company Sandra has invested in has problems, such as management committing fraud, leading to a fall in stock prices. This indicates operational risk.
Sandra tries to be smart about these risks. She spreads her money across different types of investments.
She also does research before buying stocks from reliable companies.
These are ways to manage risk and keep her money safe while having a chance to make more money.
4.1 Risk
Risk in finance refers to the uncertainty and potential for loss accompanying any investment decision. This concept applies to both individuals and businesses, as both seek to increase the value of their investments while managing the potential downsides.
For individuals, risk is evident in activities such as investing in stocks, bonds, or other assets. When individuals invest money, they hope to achieve a positive return, but there is always a chance that the investment may perform differently than expected, leading to financial loss. This uncertainty in the outcome exemplifies financial risk. Effective risk management for individuals includes strategies like diversification and thorough research to mitigate potential losses.
For businesses, risk is a crucial factor in decision-making processes related to investments, operations, and strategic planning. Businesses invest in projects, enter new markets, or develop new products with the expectation of generating profits. However, these activities come with inherent risks, such as market fluctuations, operational failures, or competitive pressures. To manage these risks, businesses implement comprehensive risk management practices, which may include conducting market analysis, securing insurance, and developing contingency plans.
In both cases, understanding and managing risk is essential for making informed financial decisions. By carefully assessing the potential for gains against the likelihood of losses, individuals and businesses can navigate uncertainties and optimize their investment outcomes.