How To Use Risk Analysis To Make You A Better Investor

What is risk analysis?

Shares - and for that matter any type of investment or speculation - carry an inherent risk. There is no guarantee of profits, rates of return or any return at all. There are however, degrees of risk.

By using risk analysis techniques it is possible to define types of risks and the level being taken and then to compare them with potential returns. This is known as the risk / reward ratio.

It is by having a deep understanding and amazing ability to forecast returns and compare against other types of investment returns that Warren Buffett has been able to amass such a fortune. He is able to project rates of return into the future with reasonable accuracy and then compare that with other potential returns.

If any of us had just half his understanding of risk analysis and comparison skills, we would be exceedingly wealthy!

So, to help you in your quest for investment profits, the pages listed below in this section will offer some definitions of useful terms in understanding risk levels. There will also be space offered to the formulas required to calculate important ratios for yourself.

It is worth noting that some of these calculations are used less for risk assessment and more for company assessment. However, by definition, understanding and valueing a company is an integral part of understanding the risk of investing in it.