Risk, relative to investing, involves the possibility of losing some or all of the money invested. You’ve probably heard a basic premise in finance that a positive relationship exists between risk and return. That is, the greater the risk, the greater the potential return.

Simply put, to entice someone to invest in stocks over bonds, there has to be a greater expected payoff for investing in stocks. Bonds pay a certain rate of interest on a certain date and have a maturity date on which principal is to be repaid to the investor. There are no contracted payment terms for stock investors. Further, bondholders get paid back before stockholders receive anything if the underlying company goes bankrupt. In most bankruptcy cases, stockholders lose everything.

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