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  • Ankur Kapur

Do not invest without knowing the risk!

Risk means the degree of uncertainty or potential financial loss inherent in an investment decision. In simple terms, the risk of losing your capital is the only risk anyone should be concerned about.


Do not invest without knowing the risk

The academic world often claims the volatility of asset price as a measure of Risk. Volatility measures price movement across the average price. If the average price is 100 and the price movement is between 100-120, the volatility is low. Whereas if the price movement is 50-300, the volatility is high.


The volatility of asset price can be taken as a measure of risk as far as negative movement is concerned. Where is the risk if you buy at 50 and the price movement is only upwards, volatility may still be high.


Imagine, your investment in a fixed deposit. The volatility is low and so is the return, it is indicated a low-risk instrument.


Now, imagine your investment in high-quality stocks (Nestle, Asian Paints, etc.). The share price grows over time. The measure of volatility is unusually high even if you earn 20% per annum in a high-quality business.


As rational investors, we should see risk only from the risk of losing the capital point of view. As far as you are invested in sound assets, your probability of losing capital is low. Now combine sound assets that are well diversified, the probability of losing capital goes further down.

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