Intro

This lesson looks at risks in investing. It covers:
- risk and return
- types of risk
- diversificationIt takes around 10 minutes to complete.

The legal bit

The information on this website is a starting point - we've linked to more information (and how to contact professional advisors) throughout the lessons if you need to know more.This is not investment, financial or tax advice.We try to make sure that information on the website is accurate and free from errors. However, to the maximum extent provided by law (but subject to your rights under the Consumer Guarantees Act), Aptitude and its personnel:
- Do not make any representations, or give any warranties, that the information is accurate, free from errors or is suitable for you.
- Do not accept any liability to you whatsoever (and however arising) for any loss or damage you incur in connection with the contents of, or your use of any of information contained in, the website.Aptitude is the trading name of Ninja Orange Ltd in relation to these lessons.

• Start

Risk and return

Generally, the greater the potential returns, the higher the risk of loss. If an investment is low risk, it usually has lower returns.If you invest your money in a savings account with your bank, it is unlikely that you will lose that money, and the bank guarantees that it will pay you a set amount of interest. This is a low-risk investment.

If you invest your money in shares, there is a chance you could lose money. Investing in shares does not guarantee a profit or assure against losses. But if the company does well, you could potentially make more than you would have in the savings account. This is a higher risk investment.Try sorted.org.nz's Investor Kickstarter, a tool to help you understand your comfort with risk, and what investment types suit your risk appetite.

• Next

Risks can include...

- Company risks: something could happen to the company, its operations, or its reputation. This could lower dividends or share price, or the company could fail completely. This would mean all shareholders lose their investment.- Market or environmental risks: an event outside the company makes the share price fall. For example, a tornado destroys coffee crops making it harder for a roaster to get beans. People buying those shares may offer less as the lack of beans is a threat to the roasters' business.- Personal risks: an event in your life means you need to sell your shares at a time when they are worth less than you want for them, but you are forced to make a sale to free up cash. For example, a job loss or illness.

• Next

Do you understand the risks to the company?

As you do your research, questions to ask include:- does the company have many competitors?
- do they rely on particular customers and markets?
- how long have they been in the industry?
- has the company borrowed a lot of money?
- do they have cash flow problems?If you’re investing in a primary offer, the product disclosure statement will show the key risks. Otherwise, you will find this information in broker research reports and the company’s annual reports.

• Next

Do you have a good mix of shares?

As with any type of investment, it is riskier to put all your eggs in one basket.If you spread your investments across a several companies, if one has a bad year then the others can help to even it out. Financial advisers can help you pick the right mix.Diversifying doesn’t guarantee you'll make money, but it can help you manage your risk.

• Next

Is it a legitimate offer?

New Zealanders have lost millions of dollars through scams they believed were legitimate. Common examples of share scams are:- you are offered shares in a well-known company and told you need to act quickly to benefit – these might be advertised as ‘pre-IPO’ shares
- after purchasing, you are told that the sale can only go ahead if you purchase more shares, or that there are taxes to be paid
- you are offered a good price for shares you already own, but told you need to pay an advance or restriction fee.In New Zealand it’s illegal to sell financial products through cold calls or other unsolicited communication. You should ignore any call, letter or email from a stranger about an opportunity to invest in shares.See the Financial Markets Authority scams page below for more tips on how to protect yourself.

• Next

1. If someone you don't know calls you with an investment opportunity, you should:

• Politely decline
• Grab this unique opportunity

2. Which is higher risk?

• All your money in one company
• Having a mix of different shares

You're all done

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Well done on completing this lesson, we hope you enjoyed it!Ready for the next one?