11 Trading and Risk

Learning Objectives:

  • Learn which questions to ask yourself before you invest in a product.
  • Understand where different products fall on the risk-reward spectrum.
  • Apply a basic understanding of the risk-reward spectrum to a real-life example.
  • Determine how to manage risk through diversification.

The Risk-Reward Spectrum

Watch the Video:

Questions To Ask Before You Invest

1. Is the seller licensed?

2. Is the investment registered?

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.

Risk-Return Activity

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.)

Risk Management through Diversification

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

  • Watch the Video:

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.


Major world market indices. (n.d.). Investor.com. Retrieved September 19, 2023, from https://www.investing.com/indices/major-indices

Risk and return. (n.d.). Investor.gov. Retrieved May 22, 2023, from https://www.investor.gov/additional-resources/information/youth/teachers-classroom-resources/risk-and-return