How investing works
By Michael Trudeau
Article 2 of 6
Everything you need to know about capital investment risk and striking a balance between risk and return.
Every investment carries some risk that you won't get back all of the money you invested. This is known as capital risk.
But in reality, there are safeguards in place that should ensure that if you stick to cash, and spread your money between banks, you are protected.
In contrast, if you invest your money in the stock market, you'll face a real risk to your capital on a daily basis. If your investments don't perform, you could end up with much less than you put in.
The financial crisis and capital risk
Before the financial crisis, few of us were overly concerned about the safety of our cash savings. However, when Northern Rock needed to be bailed out by the Bank of England in 2007, savers demanded extra protection.
Since then, tougher measures have been introduced – meaning that as long as your bank is protected by the Financial Services Compensation Scheme, the first £75,000 of your deposits will be protected if the bank goes bust (this limit was reduced from £85,000 in January 2016).
Find out more: Are my savings safe? – find out how your money is protected.
Capital investment risk: balancing risk and return
As a general rule, the higher the investment returns you want to achieve, the higher the risk you must be willing to take. Because when high gains are achievable, it's likely that high volatility will also be on the cards. While your capital could grow significantly, it could also fall dramatically.
So if you're saving for the short-term, it's best not to put your capital at risk. You can afford to take on more risk if you have a longer time frame, as you will have the chance to make up for your losses.
Find out more: Which? investment portfolios – we have created a unique set of investment portfolios that can help you decide where to invest your money, balanced with how much you're willing to put at risk.
- Last updated: March 2016
- Updated by: Michael Trudeau