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Investment

Basic concepts of investing: Return, risk, volatility

We provide an overview of basic concepts, the knowledge of which is necessary for investing.

It is not a dogmatic enumeration, but a simple explanation of several terms such as return, risk, loss, and volatility.

It is not enough to know four or five concepts to understand and, above all, run an active investment. However, it will direct you to a better understanding of the whole process, at the end of which you avoid school mistakes and the resulting losses.

Alpha omega returns and losses

One of the reasons why people start investing is to multiply money. They approach stock exchange trading as something magical. Their expectations often exceed the harsh reality. Once in a while, the media will report how a stock has skyrocketed by hundreds of percent. This is followed by an interest in the stock exchange among people who are interested in laborless profit. However, it only happens sometimes.

The key to your well-being is to determine how much returns you want to earn from your assets. Just don’t say as high as you can. Not that it wouldn’t be nice to earn tens and hundreds of percent a year. It’s just highly unlikely. Getting a ten percent annual return over an investment horizon of five years is satisfactory. Your investment will playfully overcome inflation.

At the same time, the 10% yield is relatively well realizable. Several Czech stocks paid gross dividends last year, with a yield of around ten percent. For example, let’s name the shares of Philip Morris or Telefonica O2. While the tobacco group’s dividends exceeded 10 percent, the telecommunications company paid a dividend just below that threshold.

Unrealistic expectations involve making mistakes that turn into losses. You can take unnecessary risks by setting a high return goal. You buy stocks with fluctuating value, have no dividend history or there is no interest in them on the market. At the same time as setting unattainable goals, you are working on the fact that you will have to admit a loss when evaluating at the end of the investment period. Even if you got an otherwise decent return one percent above the rate of inflation. However, you would not meet the original goal of high appreciation.

Stock value volatility or volatility

Volatility, ie the fluctuating price of securities, is at home on the capital markets. Your money, which you have converted into investments and assets, shows constant fluctuations in value. Volatility is indirectly related to losses. Some investors, looking at the investment swing, where the value of their investment portfolio has fallen by tens of percent, would rather sell than hold the shares and wait for the situation to improve.

Why are stocks volatile? Especially because they are traded on a stock exchange that other people have access to. They bring their human interpretation to the hard economic data. This mix often creates situations that have no real basis. They are the result of simplification, manipulation of information, crowd psychosis and erroneous predictions of future developments. The philosophical question is, what would markets look like if they only traded computers instead of people?

Yields also affect your investment strategy. In the case of high returns, you will trade in volatile emerging markets. If you only need a yield that exceeds inflation by units of percent, Czech titles are enough.