Trading and Risk

11 Trading and Risk

Learning Objectives:

Watch the Video:

1. Is the seller licensed?

A broker’s background and qualifications are available on FINRA’s Broker Check Database.
An investment adviser’s qualifications are available on the Investment Adviser Public Disclosure website.
If the person or entity promoting the investment has been part of a court case or proceeding, you can find it on the Securities and Exchange Commission (SEC) Action Lookup-Individuals.

2. Is the investment registered?

All offers or sales of investments must be registered with the U.S. Securities and Exchange Commission. Check with the SEC’s Electronic Data Gathering, Analysis, and Retrieval System (EDGAR) to see that it is registered before considering investing. The SEC Action Lookup feature allows you to look up information about individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

3. How do the risks compare with the rewards?

All investments involve some degree of risk. In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent in an investment decision.
In general, as investment risks rise, investors seek higher returns to compensate themselves for taking such risks.

Do the following group activity:

Find a stock (or ETF, Bond, Cryptocurrency, or other product) that you might invest in. Start with Investor.com’s table of Major World Market Indices (Major, n.d.). In your search:
- Chart how the stock (or other product) has performed for the past two years, five years, and 20 years. If an investor started with 100 shares, how much more – or less – money would he or she have now?
- Do the risks outweigh the benefits?
As a group, discuss your different stocks (or other products). Defend your choice using the data you gathered.

(Risk and return, n.d.)

The following video and activity will cover the importance of diversification:

Activity:
- Discuss with your group the investments each person chose.
- This time, pick two more investments (either from your classmates or via Investor.com’s table of Major world market indices) that diversify your portfolio.
- Be prepared to defend your choice to the class.
Answer these questions.

Key Takeaways:

Before making any investment, research the seller’s and the product’s legitimacy.
Risk is the degree of uncertainty and/or potential financial loss inherent in an investment decision.
Evaluating your own resources (rather than the potential returns of an investment) will help you determine your comfort with risk.
Diversifying refers to investing in a variety of different financial products from many different sources in order to protect yourself from risk.