Every prospectus contains a risk warning, and most people skip it. That is understandable and it is a mistake, because the single biggest determinant of whether an investment works out for you is not which security you pick. It is whether you can hold it through the period when it is losing money.
The kinds of risk you are taking
**Market risk** is the risk that prices fall generally, for reasons unconnected to the specific company you invested in. **Company-specific risk** is the risk that this particular business underperforms. **Liquidity risk** is the risk that you cannot sell when you want to, or can only sell at a substantial discount, a real consideration in a young market with limited depth. **Credit risk** applies to bonds: the issuer may not pay. **Inflation risk** is the risk that your returns fail to keep pace with rising prices, so you end up poorer in real terms even after a nominal gain.
Diversification, and what it can and cannot do
Spreading your money across different companies and asset classes reduces company-specific risk, because one failure does not take everything down. It does not remove market risk, in a broad downturn most things fall together. Diversification is a genuine protection against one kind of loss and no protection at all against another, and it is important to know which is which.
Time horizon is the real risk control
The most reliable way to reduce the chance that volatility hurts you is to not need the money soon. An investor who can wait a decade has choices an investor who needs the money next year does not. If you might need the funds within a few years, the honest answer is usually that they should not be in shares.
Questions worth answering before you invest
How much of this could I lose without it changing my life? When will I need this money back? Do I understand how this investment makes money, well enough to explain it to someone else? What would have to go wrong for this to fail, and how likely is that?
If you cannot answer the third question, that is the one to resolve first. Nobody should own something they cannot explain.
This is education, not advice
This guide explains general concepts. It does not take account of your objectives or financial circumstances and is not a recommendation to buy or sell anything. If you are unsure, seek independent advice.