"How much should I invest and where should I invest my money?" This is the one question on top of every stock market investor's mind.

When you ask this question every stock market or investment advisor will ask you," what is your risk appetite?" Lot of other questions like "what is your investment time horizon, amount you want to invest, the kind of returns you expect and your future needs" are also relevant.

The most fundamental of all these questions is what is your risk appetite. You do not really need an expert to tell you what your risk appetite is, you can analyse it for yourself.

The amount of investment risk that you are comfortable taking is thrown into sharp focus in times of volatility. What you may have found comfortable before can suddenly seem a bit too risky. So understanding risk, how it can work for you and having a good idea of your own risk appetite is absolutely essential.

Most investors use some or all of the four major investment asset classes – shares, fixed-interest, property and cash.

Spreading your investments between the different types of investment – diversifying – helps spread risk, while it's useful to create a diverse portfolio from the range of funds available, covering a huge range of investment techniques, styles, sectors and geographic regions.

Each fund is placed in a risk category, of which there are typically five: very cautious; cautious; balanced; adventurous and very adventurous.

So, how do the following definitions apply to you?

Very cautious

You are not willing to accept any risk to your investment in the short term and wish typically to invest wholly in cash assets, typically savings accounts.

 You understand that the potential for growth is small and that, over the long term, inflation will reduce the buying power of cash assets. As you typically wish to invest entirely in cash assets, investment products are unlikely to be suitable for you as they will fluctuate in value. Product charges could exceed any growth and you could get back less than you invest.

Cautious

You're looking for an investment where the return over the long term is expected to be an improvement on that available from high street deposit accounts.

You are willing to take some risk in order to seek some growth potential, understanding that this will increase the amount by which your investment will fall and rise in value. However, under normal circumstances, you would feel uncomfortable if your investments fell and rose sharply in value and you could get back less than you invest. Typically, you would consider investing in cash, fixed interest, property and equities.

Balanced

You are looking for a balance of risk and reward with the aim that, in the long-term, higher returns may result than those available from more cautious investments.

You are willing to accept that the value of your investment will fall and rise in value and you're aware that you could get back less than you invest.

You would consider investing in a wide variety of assets, such as equities, cash, fixed-interest and property. Risk will usually be reduced by spreading investment across a variety of sectors and markets and/or limiting exposure to overseas markets.

Adventurous