Financial advisers have to know precisely your risk tolerance. There are several terms for this – investor profile, risk temperament or risk profile – and they all want to answer one basic question: How would you feel about the prospect of losing some of your money?

Answering honestly this question is important because it will guide you towards the investments that are right for you. There are people who will not sleep for days if they know they can loose 10 percent of their savings. If you are one of these, high risk investments are not for you. On the other hand, if you are thrilled by the ups and downs of the stock market, then you will find boring the 3 percent earning of the government bonds.

There are several classifications of risk tolerance: there are simpler models with only three categories (conservative, moderate and aggressive), but other classifications operate with as many as seven categories, from very defensive to very aggressive. You can find lots of tolerance calculators on the Web.

Basically if you buy stock you get to own a part of a company or a mutual fund. Your rights will depend on which type of stock you buy: common, capital or preferred. Common stock shares profits in form of dividends. Preferred stock has fixed dividends, and this is why the price of a preferred stock grows slower.

Unlike stocks, bonds are not about ownership: they are a loan to the issuer. The issuer makes a promise to pay back the principal with an interest. Those who buy government bonds lend money to the federal government, with a guaranteed return. You can not make as much profit on bonds than stocks because there is no risk of losing your initial investment.

Mutual funds use their money to invest in other companies. If you own shares in a mutual fund you basically own fractions of shares in a variety of companies. Mutual funds are usually categorized by market sectors: health, transportation and so on.

Each investment has its own risk factor. Usually those opportunities that are not risky do not earn much, and vice versa: if you decide to buy stocks with a high rate of risk you will be able to earn more. But of course, there will be a chance to loose some money. Experts usually advice newcomers to develop a diversified portfolio, with some very safe government bonds, but also some high-risk stocks.