Chapter 2. Evaluating Risk

Risk is the probability of losing money. All stocks are risky compared to government-insured savings accounts; but some stocks are a lot riskier than others. Yet investors rarely evaluate the inherent risks when contemplating buying a stock. But it makes sense to do so. For instance, suppose that you were considering two stocks, and your analysis showed that both had the possibility of doubling in price over the next two years, but Company A's stock was twice as risky as Company B's. Knowing that, the choice between Company A and Company B becomes obvious.