of the stock's current value. This can make for huge upward moves, but this is offset by the risk of losing 100% of the money put into the option. (Most purchasers of options lose money.) If an investor owns an option and the underlying stock is not within the given price range within the given time period, the option expires worthless. 4.The risk-reward trade-off:Low risk:Includes cash, deposits, fixed interest investments held to maturity, guaranteed income bonds, zero dividend preference shares. The aim is preservation of the nominal value of capital. I.e. 10,000 today will be 10,000 in ten years time. The risk is that inflation may erode the real value of that capital. If inflation is 5% for 10 years then at the end of that time your fund is only really worth 6000. These investments are fine as a short-term home for funds whose capital value must be protected, but are not suitable for long term money. You pay for short-term safety with long term lack of performance. One has to be cautious as to the amount deposited with any one institution in case the institution itself collapses.Middle risk:These are funds that try to preserve, or slowly increase the capital value of the investment over time, (i.e. after the effect of inflation). They usually use a mixture of investments to match their needs but in general those that will accept short term risk for long term gain weight in favour of equities and roll with the market, while those that seek to minimise short term losses will adopt protective measures from time to time. However such measures come at the cost of long term growth. Most income oriented investments that are not cash based fall into this group. The investment might include equities, convertibles, futures, options and other (protective) derivatives, fixed interest holdings, split capital investment trusts, with profit bonds. High Risk:This covers the "fun" money. Money invested in the hope, but not expectation of, very hig...
