Rating is based on the overall factors of risk for the investment. How likely is it to lose money? How much can you lose? Are there ways to exit the investment if it starts falling? How volatile is this investment? These are all factors that considered in this risk rating.
The rating of 1 indicates a very low degree of risk; 5 indicates a very high degree of risk. In terms of comparable investments, a FDIC insured bank CD or money market would have a risk rating of 1, an S&P indexed fund or ETF would have a 3 and investing in an emerging foreign market might have a risk rating of 5 (depending on the particular market in question).
Rating is based on projected annual ROI (return on investment) of a typical investment:
1 = 0–4.9%
2 = 5–9.9%
3 = 10–14.9%
4 = 15–25%
5 = >25%
Rating is based on the amount of knowledge an investor needs in order to successfully navigate this particular investment.
A rating of 1 would represent a very easy and straightforward investment which requires virtually no knowledge or expertise, such as a bank CD or savings account. A 5 rating might be an investment in start-up companies, or trading stock options utilizing complicated hedging strategies. If the investment is only available to accredited investors, it will automatically receive a 5 rating.
This rating is based upon the amount of capital required to get started in this particular investment.
1 = <$10,000
2 = $10,000-$50,000
3 = $50,001-$100,000
4 = $100,001-$250,000
5 = >$250,000
This rating is representative of the availability of the particular investment. If this investment is available to anyone, anywhere, then it will receive a high rating. If there is a small number of available investments and finding them is nearly impossible, then it will receive a very low rating.
This rating is representative of the time commitment that an investor will most likely need to devote to this investment. The following numbers represent the average hours an investor would spend a week on this investment:
1 = 0
2 = >0, <1
3 = >1, <2
4 = >2, <5
5 = >5