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.

Even within a class of investments, such as stocks, it remains true that the only reason a person would rationally take on a riskier investment is because the heightened risk has the chance of realizing a heightened reward, relative to less risky stock investments.

However, stock investors should take care not to become entrapped by the notion that a greater risk appetite is likely to result in a healthier reward. There’s a reason for the age-old market adage to “buy low and sell high.”

Regardless of the type of company stock being purchased, whether from the oil and gas industry, the home furnishings industry, the biotechnology industry, etc., it remains that in order to experience the potential of return, you must know how to buy when the risk is low. A low price (quality investment at a bargain price) suggests a potentially lower level of risk. You may be investing in a “riskier” sector/industry of the stock market, but this should not equate to overpaying for the stock.

To minimize the risk of loss, regardless of the type of investment…..bonds, stocks, whatever….it is important to buy high quality when it is available for a bargain price. The reason I wrote my book, Choose Stocks Wisely: A Formula That Produced Amazing Returns, was to tout the balance sheet of corporations as the primary tool for evaluating the quality of a company and what a potential low price looks like relative to stocks. Whatever you are buying, you don’t want to buy a “lemon,” and even after determining it looks really good, you also don’t want to overpay.

Buying quality at a bargain price means lowering the risk and doing so improves the prospect of realizing more of the potential upside. My mantra is the balance sheet when it comes to lowering the risk with stock investing.