Risk Versus Reward

In all investment situations, we will be confronted with both hazard and reward. I cannot believe of any investings that offer no hazard with large reward. The most common investing chance I have got seen is low hazard - low reward, low risk- high reward, large hazard - large reward, large hazard - low reward.

Big hazard - low reward chances are everywhere. Buying a stock at any terms will represent a large hazard - low reward investing opportunities. The odd is even worse than gaming where the house have a 55-60% opportunity of winning.

You might be wondering how you can quantify risk. Reward is easier to quantify. If you purchase stock A at Ten terms and it have risen to Y, then your reward is the difference between your merchandising terms and purchase price. Some hazard can be quantify while others aren't.

Let's usage an illustration for elucidation purpose. What is the hazard of purchasing Merck Carbon Dioxide & Inc. (MRK)? The hazard is well publicized. Investors' hazard would be the possible Rofecoxib liability that stems from lawsuits. How much makes MRK have to pay? Cipher cognizes for sure. We can only estimate. Some states $ 5 Billion. Another states $ 50 Billion. This is uncertainness and this is risk. You can reduce this hazard by reading more and then do a conservative estimation regarding this issue.

Are there other hazards associated with Merck? Sure. Patent termination is one. Its best merchandising drug, Zocor, is slated to lose patent of invention protection in 2006. Cipher cognizes what other drugs can replace Zocor's revenue. Competition is also one word form of risk. Competitors can always outsmart a company and do a merchandise obsolete. These are all uncertainties. These are risks. Since the hereafter is always uncertain, the hazard is always there. What we can make as investors is merely to reduce the hazard by making better estimate and knowing as much as you can.