Investment
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How To Recognize And Avoid Risky Investments
by: Steven Boaze
The patterns of any particular investment will detail the relative
risks and rewards undertaken with each investment. Risks can be
defined as "the chance or possibility of injury, damage or loss."
Risk focuses on the future and our ability to forecast that future.
In turn, the ability to predict the future is largely dependent on
what you've learned from the past. The best you can do is to study
the record and draw on experience - your own and that of others.
On the surface, the relationship between risk and return seems
straight forward. In general, you will find that risk and return
move in the same direction. In other words, if you accept a higher
risk, it is possible to achieve higher returns. High-risk
investments invariably promise a high return.
But equally important, where it is possible to win big, you can lose
big. And the odds are always with the "house" (the provider of the
risk-return). If all it took to create instant wealth was assuming
high risks, then you could assure yourself of millionaire status
simply by attending the race track every day and betting all your
money on the long shots!
Avoiding Risky Investments
No other advice on investing is complete without a few important
warnings. The investment industry has its share of unscrupulous
people who, at best, will mismanage your investment, and at worst,
steal you blind.
They'll come at you with Ponzi schemes, pyramid deals, real estate
that's never been any good and never will, and telephone offers or
email offers of stock or funds or oil leases or gems or precious
metals, etc., that offer large and easy returns with no risk.
These salespeople play on a universal desire to "get something for
nothing" and to "get rich quick." Most of us are not immune to a
good pitch. However, by just taking the simple precaution of
thoroughly investigating an investment offer yourself or through a
trusted accountant, lawyer, financial adviser, etc., you'll greatly
minimize the risk. The best caveat to bear in mind is: "if it sounds
too good to be true, it probably is."
Watch out for the Ponzi and Pyramid.
In their eagerness to make a lot of money quickly, many people and
millions of dollars every year are sucked into Ponzi schemes and
pyramid deals. In the former, expect to lose your money, and in the
latter there's a very high probability that you're wasting time and
money.
In the 1920s Charles Ponzi invented a simple, alluring investment
fraud that's still practiced today. In its simplest form, a
swift-talking promoter will ask you to give them, say $5,000 to
invest in a spectacular, usually secret, investment to which the
promoter has access. They promise a spectacular return of, say 20
percent in three months.
At the end of the three months, they offer to deliver $6,000 (your
investment plus your return) but suggests that you let it all "ride"
for an even better return in another three months to six months.
What you don't know is that there is no investment. The promoter is
simply gathering as much as they can from as many suckers as they
can convince. Then they have to pay Peter, it comes from Paul.
Eventually, the promoter disappears with the bulk of the
"investment" money.
A Pyramid scheme is an illegal type of multilevel sales- except
usually there is no product sold. You are asked to pay ($500,
$1,000, $10,000 etc.) to become part of the pyramid. The amount of
your payment to the promoter determines your position level in the
pyramid and "allows" you to promote the pyramid to others. The more
people you bring into the pyramid, the higher you rise and the
closer you get to the big payoff.
Financial Risk
For most investors, financial risk is the most immediate one. It
centers on the simple question, "If I put my money into this
investment, will I at least get my money back?"
Your best protection against financial risk is to explore any
investment to the point where you understand the factors that risk
and/or secure your principle. When you buy a common stock, for
example, the financial risk is tied to the credit and operating
histories of the company issuing the stock.
So you analyze the firm's financial capacity (ability to generate
income). A firm that can't pay its debts or has a low financial
capacity and a comparatively high financial risk. A company with
earnings high enough to pay fixed costs many times over is thought
to pose a lower financial risk.
Generally, such vehicles as certificates of deposit, commercial
short-term paper, federal savings bonds and Treasury securities are
considered of low financial risk. Whenever you evaluate the risk
inherent in a given investment, ask yourself:
1. What kind of risk is involved?
2. What is the extent of this risk?
3. Is the potential return worth this risk?
By first learning a set of criteria with which you can evaluate an
investment, and then considering those objectives in light of your
personal factors, you've begun acting like an investor.
About The Author
Steven Boaze, Chairman, is The Owner of Boaze.com Corporate Web
Solutions. Steven is the Author of two successful Books, thousands
of articles featured in radio, magazines newspapers and trade
journals. Steven has 28 years experience in journalism, copywriting,
certified Web Developer. http://www.copywriteplus.com
http://www.boaze.com Copyright © 1998-2006 Boaze.com.