The next big question is how much risk you should take when investing. Well, unlike most of the people think, investing investing in the stock market does not have to carry great risk.
Risk can be reduced by many factors.
Knowledge: The more knowledge you gain the lower is the risk you take.
Diversifying - By diversifying your portfolio you can greatly reduce your risk, but also reduce your chances for making some serious gains. With knowledgeable investors in almost every case, the bigger the risk, the greater is a change for greater return.
Bigger Capitalization - Usually companies with bigger market capitalization carry less risk. However this doesn't have to be always true, as we did see stocks of many big companies go under for various reasons: Enron, United Airlines, etc.
However, like I said before, the more risk you take the bigger potential for growth is. There are many different type of risks one should consider while investing. These risks can be: Financial risk, market risk , inflation risk, tax risk, personal risk, political risk, emotional risk, etc.
When deciding how much risk you should take, first you should set your financial goals. Do you need to save for your retirement, or you need some quick cash in six months.
Low Risk:
The older you are the less risk you should take. If young person lose substantial money while investing, they have greater chance on getting that money back, than somebody who is close to their retirement. Therefore, if you are close to your retirement try to invest in securities that carry the lowest risk. Mutual funds, for example.To get a better picture you can use Investing Calculator. You do not have to follow it exactly, however it can give you a good picture of how much and where you should invest based on your input.
Medium Risk
Medium risk is the amount of risk that most investors take. What I consider medium risk would be, for example, investing into a well established company, with little diversification, or investing into several different companies, but from the same industry. When you diversify you substantially lower the risk of losing money, however, in the same time you lower the possibility of making any substantial gain.
High Risk
If you need to raise some quick cash, or just love living risky, then micro and small cap stocks are the ones for you. This is by the way my way of the investing (usually). Although the risk you take with these companies is big in general, it still varies through the sector depending on the company.
Stock with the biggest possible risk, but equally the biggest possible rewards are most certainly biotech stocks. Every single phase of trial some drug of these companies pass it sends their stocks flying up. And if FDA approved these stocks more than double in matter of days. However, there are even bigger chances that drug will fail the trial and/or not get approved by FDA. Well in that case stocks plunge over night.
I cannot even remember of how many times I came across biotech stocks that went over 100% in matter of hours and got disappointed because I didn't own them.
But that's the gamble. I never refer to investing as gamble because I think that investing is much less risky than gambling, if you know what you're doing. The only time you actually gamble is by investing in penny stocks, but even then, by using trailing stops and being wise you can cut the potential losses substantially.
I have written more about high risk penny stocks here.