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Before you even begin to invest in the stock market, the first step in the process is to understand and quantify the risk. As the advertisements say, the stock market can go down as well as up. Thus it is important to ensure the funds you intend to use for your investment portfolio are funds that you do not need for other purposes, such as living expenses. The rule is never to risk more than you can afford to lose.

When you have decided the limit of your investment, the stock market will offer you a range of opportunities and these will have varying levels of risk attached to them. Having decided your investment limit, the next step therefore is to plan how you are going to spread the monies over the range of stock market products that will give you the best return, whilst at the same time minimizing the risk that you are taking. The choice may include stocks and equities, bonds, mutual funds and cash.

1. Stocks and equities

Investing in stocks can bring enormous rewards, but at the same time they can equally lose you money. Of the four options outlined here, there is no doubt that they present the highest level of risk, and even the most experienced of investors will be caught out occasionally.

Historically it has been proven that over a reasonable period of time, say five years, stocks outperform other types of investments by a significant margin. Therefore, unless there is a good reason not to, you should not be looking at these investments for the short term.

Similarly, in view of the high level of risk involved, you would not want to put all of your funds into stocks.

2. Bonds

Bonds are less of a risk than stocks and thus can be considered a wise place for a proportion of your funds. The risk is particularly minimized where these bonds are connected to the government and treasury, as these institutions are less likely to be subject to default than bonds issues by commercial organizations. The only drawback with bonds is that they tend to lose a little value in the interest produced falls below money market rates. In this respect a longer-term bond may be attractive as it gives you more options to realize the investment at the appropriate time.

Therefore, investing some of your funds in bonds will help to balance the risk attached to other areas of your portfolio.

3. Mutual Funds

In many ways, mutual funds are one of the lowest investment risks available. A mutual fund is an organization that uses the monies from a wider number of investors to spread around all of

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