Risk tolerance is how much of a loss you are willing to accept in exchange for a chance at a higher return. Someone with a higher risk tolerance chooses volatile stocks, where prices swing and the possible gain is larger. Someone with a lower risk tolerance chooses blue-chip stocks and bonds, which pay steadier dividends and interest. If you have many years before you need the money, you can take more of that risk, because a bad year leaves time to recoup the loss.

Related Lessons:

• Click Here for our lesson on How to Develop an Investing Strategy
• Click Here for our lesson on Knowing Your Risks & Risk Tolerance
• Click Here for our lesson on How Companies Finance Their Growth
• Click Here for our lesson on Types of Insurance
• Click Here for our lesson on The Secret to a Comfortable Retirement