Beginner's Guide to Risk Tolerance

Editor's note: This is a special excerpt from TheStreet.com Ratings' Ultimate Guided Tour of Stock Investing. Other Beginner's Guides cover stock basics, market indices, diversification and financial goals.

Taming That Animal Called Risk

Once you stare risk in the face, we promise you won't be scared. To get a grip on risk before it gets a grip on you, ask yourself these four important questions:

1. How Much Risk Can I Handle?

Only as much as you're comfortable losing.

Take on too much risk, and you'll panic, selling at the worst possible time. When's that? When you sell low, which is the opposite of tried-and-true investing smarts -- buying low and selling high.

Ask yourself: How much am I comfortable losing over a year and still be able to stick to my plan (see "Beginner's Guide to Financial Goals")?

5% or less? You have a low tolerance for risk .

6%-15%? You have a moderate tolerance for risk.

16%-25%? You have a high tolerance for risk.

Let's assume you have $10,000 to invest (see capital ).

If you are comfortable losing only $500, then you have a low tolerance for risk.

If you could handle losing up to $1,500, you have a moderate tolerance for risk.

You have a high tolerance for risk if you could accept losing up to $2,500.

2. How Do I Balance Risk Against My Expectations?

Don't take on more than you can handle. There's always a tradeoff with risk -- the greater the uncertainty, the greater the potential for higher returns . Stay in your own personal risk zone, regardless of what the market does (see "Beginner's Guide to Market Indices").