Module 3: Knowing Your Comfort with Risk

Modified on Tue, 29 Apr at 3:07 PM

Every investor has a unique risk appetite, which refers to how much uncertainty or potential loss you're willing to tolerate when investing or trading. Your risk appetite is personal—it depends on how comfortable you are with market volatility and price swings.

What is Risk Tolerance?

Risk tolerance can vary greatly from person to person. For example, when investing in stocks or ETFs, you might see daily price fluctuations. If the market drops by 5%, how do you react? Do you panic and sell your investments, or do you hold on, trusting that the market will recover over time? Your ability to manage these ups and downs without losing confidence is crucial when choosing the financial products.

In this module, we’ll help you assess your own emotional comfort with risk. Imagine this scenario: You invest €1,000, and a week later, the value drops to €900. Do you panic and sell, or do you stay committed, hoping the market will bounce back? Your reaction to situations like this will guide you in determining which financial products align best with your emotional comfort level. Your reaction to situations like this can help you reflect on your emotional comfort with risk, which is one factor in evaluating suitable financial products.

Understanding Leverage and Its Impact

We’ll also dive into leverage, an important factor when dealing with high-risk products like CFDs. Leverage allows you to control a larger position with a smaller deposit. However, it’s crucial to understand that leverage amplifies both potential gains and losses.

For example, if you invest €1,000 with 1:30 leverage, you’re actually controlling €30,000 worth of assets. While this could result in significant profits, it also means that if the market moves against you, the losses can be equally large. Understanding how leverage works will help you assess whether it’s a suitable option for your risk tolerance and goals.

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