Individual stocks are popular investments that are easy to sell and have the potential to earn significant income for investors. However, they fluctuate wildly in price, increasing the likelihood that an investment fails. What is the risk, return, and liquidity on this type of investment?
a. high risk, high return, good liquidity
b. low risk, high return, good liquidity
c. high risk, high return, poor liquidity
d. low risk, low return, poor liquidity
The correct answer is c. high risk, high return, poor liquidity.
Individual stocks are known for their high risk because their prices can experience significant fluctuations, increasing the chance of investment failure. However, they also have the potential for high returns if the investor chooses the right stocks.
Regarding liquidity, individual stocks generally have good liquidity because they can be easily bought and sold on the stock market. However, compared to other investment options such as bonds or mutual funds, individual stocks have relatively poorer liquidity.
The answer to this question is c. high risk, high return, poor liquidity.
To understand why, let's break down the different components:
1. Risk: Individual stocks are typically considered to have a high level of risk. This is because their prices are influenced by various factors such as market conditions, company performance, industry trends, and investor sentiment. These factors can lead to significant price volatility. Therefore, investing solely in individual stocks increases the likelihood of investment failure.
2. Return: While individual stocks come with high risk, they also offer the potential for high returns. The price fluctuations can work in an investor's favor, allowing them to profit significantly if they make the right investment decisions. However, it's important to note that high returns are not guaranteed, and there is always the possibility of losing money.
3. Liquidity: Liquidity refers to how easily an investment can be bought or sold without causing significant price changes. Individual stocks are generally considered to have good liquidity because they are traded on stock exchanges, where buyers and sellers can transact relatively quickly. However, the term "poor liquidity" in this context may refer to situations where certain stocks have low trading volumes or limited market interest, making it more challenging to buy or sell large quantities without impacting the stock's price.
So, considering the high risk associated with individual stocks, the potential for high returns, and the possibility of limited liquidity for certain stocks, the option that best describes this type of investment is c. high risk, high return, poor liquidity.