Relation between risks and profits

Risks and profits have always been connected: the higher the risk, the greater the (potential) profits. But how fast does the risk increase and up to what level can you handle the risks?

No risks, no profits

saving no profitWithout risk you won’t make a lot of money. When you put your money in the bank, all it does is become less valuable, because the interest barely covers inflation if at all. Moreover, most of the interest you earn still goes back to the government as you pay taxes on your wealth.

Saving your money won’t make you rich because saving your money isn’t risky at all. The chances that a bank will go out of business are very slim, even in times of economic crisis. And even if this does happen, you’re insured up to a certain amount. This amount varies from country to country, so make sure you do your research.

Deposit accounts

If you want to make as much money as possible with as little risk as possible, it may be interesting to look into a deposit account. This is a savings account, but you’re still basically stealing your own money. It only gives you one maybe two percent extra annual interest, if you’re lucky. With a deposit account you can’t withdraw your money for a set amount of time (one, two and sometimes five years). Think twice before you store your money away for that long

Bonds: one step further

When you want to make more money without too much risk, then bonds may be a good choice for you. Bonds do have a downside of becoming less valuable over time. Luckily you still get the interest payments from the company. As long as you hold the bonds you won’t lose money. The only real risk of a bond is that a company goes out of business. In that case you will probably lose a huge chunk of your portfolio. Keep an eye on the solvency of a company – or even government for government-issued bonds – to prevent such losses from happening.

Tip: Look at our course on trading bonds for more information.

Real profit with stock

Trading stocks can be very profitable. By buying and selling stock at the right time, you can make a lot of money. This doesn’t have to be a short-term gig; you can also buy stocks for the long-term. By reinvesting your dividends, you can slowly build up a huge portfolio and make more money as you go.

The potential profits are high, but so are the risks you’re taking. Prices of stocks move a lot faster than those of bonds and can drop a lot quicker too. While bonds always pay you interest, dividends paid from stocks aren’t certain. When you buy stocks for the long term, make sure that you do comprehensive market analysis of the stocks and the companies before you purchase them.

Options and other derivatives

Finally, we have options and other derivatives. Both can be very profitable – up to 45 percent on a single trade. This all means you can lose a lot of money. These forms of trading can be very profitable when you do your research properly, but it’s important that you don’t risk your entire balance on a single trade.

Tip: Trading CFDs is a very nice way of trying out trading.
Type (potential) return Risks
Savings  2-3 percent None up to £75000 with any bank
Deposit  2.5-3.5 percent None as long as you don’t suddenly need the money
Bonds 3-7 percent Depends on solvency
Stock 4-8 percent Value can drop, dividends vary
Options 8-100 percent Completely dependent on its form, but usually high risk

Useful links: start trading directly!