I know everyone has heard the saying high risk equals high rewards when investing stocks; however, it is never fun to take on too much risk; therefore, I will present a method that is a stable with anyone who does not want to lose their shirt when investing.
The risk/reward ratio will give everyone a tool to use when he or she is deciding what or when to invest. The risk/reward ratio will vary due in part of the investing strategy the investor may use. An example of the risk/reward ratio is found below:
XYZ is trading at 20.00
If the investor expects a share of XYZ to rise and he or she has determined it would be a gain = 10.00 dollars
The worst case scenario the investor is only willing to accept a XYZ to drop or lose = 2.00
The risk/reward ratio for the example would be 2:10 or 1:5
The use of the ratio can help determine if a stock is worth the amount of money he or she plans to invest to make the profit he or she predetermined.
The risk/reward ratio should not be only piece of information used when investing in the stock market. Investors should always research and make sure he or she get the information needed to make an informed decision.