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People’s first impulse when faced with investments is usually to choose the safest and most prudent deal for their savings plan. After all, nobody wants to risk losing hard-earned money. It is only but natural that people have a certain degree of aversion to risk, but since any form of financial endeavor always entails the danger and hazard of losing money, it is very important that people who are planning to invest know and understand the basics of investment risks.

Every one of us has risk tolerance - the amount of risk that we are prepared and able to take when it comes to making crucial financial decisions. It is the degree or amount of uncertainty that an investor can handle with regards to the possibility of a negative change in the worth of his portfolio.

There are many factors that determine the level of your risk tolerance. These factors are usually unique to you which make degrees of risk tolerance differ from one person to another. Risk tolerance is based on your experience, age, risk capital, net worth, and trade or actual investment being considered.

Your previous investment experience partly establishes your risk tolerance and over-all attitude to risk. An awful investment experience from the past can cause trauma that may increase your aversion to risk. A good experience can also give you more confidence when it comes to investing. Either way, your experiences has provided you with lessons that will help you understand risks more.

Age also matters in risks since, the younger you are, the bigger degree of risk you can take. When you are young, you have more time to recover from loss, so you might just as well risk a little bit more.

Net worth is your assets minus the liabilities, while risk capital is money available to trade or invest that will not have a major effect on you once lost. An investor with a high net worth may assume more risk since the investment makes up only a smaller percentage of your wealth. Investors with high risk capital may also assume more risk since they can lose a considerable amount of money and still have no risk of sleeping on the streets.

Your investment objectives and financial goals must also be considered when calculating your risk tolerances. If you are saving for retirement or for your child’s college education, how much risk are you willing to take? When investing, you must know that you might lose hard-earned money anytime. Make sure you are prepared for the worst.