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This publication discusses risks associated with investing, and then gives a brief introduction to 21 investment alternatives. The alternatives are classified into seven types of investments.
Risks Associated With Investing
There are many types of risk involved with investments. Let's consider two types: investment risk and purchasing power risk.
Investment risk is the probability that the actual return on an investment will be different from what you expect. This is the type of risk one usually thinks of when considering investments. For example, CD's and EE savings bonds are considered safe investments because the probability that the actual return on your investment will be what you expect is 100 percent. They are guaranteed. On the other hand, stocks are considered more risky because you have no guarantee about the actual return.
Of equal importance is a second type of risk associated with investments which is also important to consider. Purchasing power risk is the risk that the value of the money you invest will not keep up with inflation. In general, this risk is greatest with those investment alternatives with a set, guaranteed rate of return. So while CD's have a low investment risk, they have a high purchasing power risk.