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The Inverse Relationship between Risk and Face Value

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Whenever an individual buys securities, he or she must consider what is known as face value. Unlike the face value of consumer goods, face values on securities are not always static. Depending on the type of security one purchases, face value could change from time to time, negatively or positively impacting one’s investments.

There are two types of face value to consider. The first relates to the purchase of corporate or US treasury bonds. Where these bonds are concerned, the face value is the amount of money that will be repaid when the bond comes to maturity. A $500 Treasury bond will pay that amount at maturity in return for the investor loaning the US government the use of his or her money for the term.

The face value on equities, such as corporate stocks for example, is the value at the time of sale or purchase. For example, you may pay $10 for one share of Company ABC. That is its face value at the time of purchase. If market conditions push the price of that stock up to $11 per share next week, that would be its face value for the new investor who purchases his first shares. You could also sell your shares at that price in order to make a profit.

It should be clear from this explanation why face value and investment risk are inversely related. In order to enjoy the potential of a higher face value down the road, the investor must also be willing to risk losing value as well. An investor looking for guaranteed face value takes almost no risk by purchasing a corporate or U.S. Treasury bond. With little risk comes little reward.

Before you make any investments, be sure you understand how face value applies to the instrument you are hoping to invest in. If you do not understand how it all works, be sure to consult a professional before investing. We hope that you will make money with most, if not all, of your investments. Nevertheless, you could lose. How much you are willing to risk affects how much you can earn.

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Meet the Author

Anthony Carter currently resides in Fife, Scotland with his wife Lisa, and their three wonderful children. As a senior editor for various publications, if he's not reading and writing, you would find him photographing and traveling to some of the most far-flung locations around the world.

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