Investment Risk
The various risks you take as an investor can be broadly categorized as either systematic or nonsystematic.
Systematic risk, or market risk, is characteristic of the entire market or a particular market segment. Because the market is inherently unpredictable, systematic risk always exists. There is always the chance that the entire market, or a particular market segment, will experience an economic downturn.
A strategic use of asset allocation can help limit systematic risk. For example, in the bond market, when interest rates rise, the value of previously issued bonds decreases, thereby decreasing their relative value compared with bonds currently selling in the market. When this happens, new investors will be attracted to the bond market because of the higher rates. However, the popularity of the bond market has a negative effect on the stock market because investors will tend to leave stocks for bonds, where they can get a higher return with lower risk.
When the opposite happens, as it inevitably does, and interest rates drop, investors tend to put money into stocks for their higher potential returns, driving stock prices up.
To take advantage of this regular pattern of market ups and downs, allocating percentages of your portfolio to both of these asset classes, and others, can help counter the negative effects of a decline in one asset class and let you take advantage of gains in the other.
While asset allocation helps mitigate systematic risk, diversification can help alleviate nonsystematic risk.
Nonsystematic risk is based on unpredictable factors, like poor management decisions within a company or the introduction of competitive products. Because nonsystematic risk is based on the performance of an individual company or groups of companies, diversifying your portfolio by investing in a variety of companies within each asset class or in mutual funds within that class can help counteract nonsystematic risk. If you invest in more than one company, or in a mutual fund, your portfolio will be better protected against the adverse effects of one single company's failure.
Investors should consider the investment objectives, risks, charges, and expenses of mutual fund carefully before investing. A prospectus contains this and other information about the fund and is available through www.scottrade.com or through a Scottrade branch office. The prospectus should be read carefully before investing.
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Any specific securities, or types of securities, used as examples are for demonstration purposes only. No information on this Web site should be considered a recommendation or None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security.
Investors should consider the investment objectives, risks, and charges and expenses of a mutual fund carefully before investing. A mutual fund's prospectus contains this and other information about the mutual fund. Prospectuses are available through our trading site or through a Scottrade branch office. The prospectus should be read carefully before investing. No transaction fee (NTF) funds are subject to the terms and conditions of the NTF funds program. Scottrade is compensated by the funds participating in the NTF program through recordkeeping, shareholder, or SEC 12b-1 fees.
Investors should consider the investment objectives, charges, expense, and unique risk profile of an Exchange Traded Fund (ETF) carefully before investing. Leveraged and Inverse ETFs may not be suitable for long-term investors and may increase exposure to volatility through the use of leverage, short sales of securities, derivatives and other complex investment strategies. A prospectus contains this and other information about the ETF and should be obtained from the issuer. The prospectus should be read carefully before investing.
Margin trading involves interest charges and risks, including the potential to lose more than deposited, or the need to deposit additional collateral in a falling market. Margin Disclosure Statement (PDF) is available for download, or it is available at one of our branch offices. It contains information on our lending policies, interest charges, and the risks associated with margin accounts.
Options involve risk and are not suitable for all investors. Detailed information on our policies and the risks associated with options can be found in the Scottrade Options Application and Agreement, Brokerage Account Agreement, and by downloading the Characteristics and Risks of Standardized Options and Supplements (PDF) from The Options Clearing Corporation, or by requesting a copy from your local branch office. Supporting documentation for any claims will be supplied upon request.
Market volatility, volume, and system availability may impact account access and trade execution.
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