Discuss how investors base their investment decisions on the return anticipated from each investment and the risk associated with that return
Investors base their investment decisions on the return anticipated from each investment and the risk associated with that return.
The return from investing in the shares of common stock has two components: cash dividends and the change in the market price of the common stock.The market price of the common stock will likely change between the time that the shares are purchased and the time in the future when they are sold. The difference between the eventual selling price and the purchase price, often called price appreciation (or price depreciation, if negative), provides the second component of the return from buying the stock.
The common stock investment involves more risk than does the certificate of deposit investment. Economy-wide factors, such as inflation, unemployment, and changes in international tensions will also affect the market price of common shares. Also, specific industry factors, such as changes in exchange rates that affect the cost of merchandise or changes in government regulatory actions, may influence the market price of the shares.
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