Never confuse risk and volatility in investing

The Article is written by James Saft.

The investors ignores the fundamentals of investing in the stock market this result in lower returns
or permanent loss of capital. In the broadest terms, fundamental analysis involves looking at any data,
besides the trading patterns of the stock itself, which can be expected to impact the price or perceived
value of a stock. Fundamental analysis focuses on creating a portrait of a company, identifying the
intrinsic, or fundamental, value of its shares and buying or selling the stock based on that information.
Some of the indicators commonly used to assess company fundamentals include:
cash flow
return on assets
conservative gearing
history of profit retention for funding future growth
soundness of capital management for the maximization of shareholder earnings and returns
The two dangerous ways of thinking about investment are:
That risk equates with volatility
That risk and rewards are a straight trade-off.
These two ways of thinking are big mistakes in finance both are for short period.
The investor should use the fundamental analysis tools for investment describes above.
Volatility is interchangeably used with risk but it is not the case. Volatility is a measure for variation of
price of a financial instrument over time. Risk is the possibility that an actual return on an investment will
be lower than the expected return, thats why investor wants extra return for bearing the risk. Volatility is
up-and-down movement of the market. It's usually measured by the standard deviation from the
expectation. If you look at a day, the movement is typically up, but not by very much. Any movement up
or down from its expectation is the volatility. Volatility of a stock is the amount a stock is likely to move
away from the price at which it was traded at any given time.
Volatility can cause permanent loss of capital because higher volatility means that the share price range is
likely to be wider than the range for a low volatility stock. From an investors viewpoint this is an
important concept. Stocks that move by larger margins can be more profitable on the upside, but also
carry a greater risk of loss. In other words, volatility is a measure of risk. Thats why volatile securities
give higher rewards.

Volatility is only one source of permanent loss.

By diversification or pooling of investment the loss can be minimized/Higher risk is associated with
greater probability of higher return and lower risk with a greater probability of smaller return. This trade
off which an investor faces between risk and return while considering investment decisions is called the
risk return trade off.
While the Government through Central banks protect the economy from going down by funding the
market this will create problem in identifying the real risks of market.The investors like the Stock market
ups and downs because they earn in between ups and downs.But the fact that these ups and downs have
been created most of the time by the big market palyers who runs the market from back.
Investors should concentrate on fundamental analysis before investing in the market.




Submitted By
Syed Mazhar Ali Kazmi
ERP No:06750