Risk Taker

Updated on April 19, 2024
Article byNiti Gupta
Reviewed byDheeraj Vaidya, CFA, FRM

Risk Taker Meaning

Risk Takers are individuals or investors who see opportunity in the market volatility and risk a great deal in expectation of a high rate of return. They have an inclination towards high-risk investments with a great potential of return as well as a loss at the same time.

Risk Taker Meaning

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By investing in high-risk investment options, they de-risk the market for more conservative investors. This kind of behavior is common in a bullish market where prices continue to rise, instigating investors to take more and more risk. However, such a mindset also lets investors learn many new concepts, ideas and strategies that help them during their trading journey.

Key Takeaways

  • A risk taker is an individual or entity that embraces or seeks out opportunities with a higher level of risk in pursuit of potential rewards or returns.
  • Risk takers are often characterized by their willingness to take on uncertainty, make bold decisions, and explore new or unconventional paths.
  • Being a risk taker can lead to both successes and failures, as higher risks carry the potential for greater rewards but also more significant losses.
  • Risk takers often possess confidence, resilience, adaptability, and a proactive mindset, enabling them to navigate and capitalize on risky situations.

Risk Taker Explained

Risk takers are very well versed or even intrigued by the uncertainty of the return; they see opportunity in the market fluctuations. They generally go after the short-term growth investment in which the expected rate of return is quite high. Risk takers are willing to tolerate economic uncertainty in exchange for a high rate of return.

As we know by now that risk takers do not like conservative investment portfolios or techniques. The financial advisors who are dealing with these calculated risk taker need to undergo a lot of work in finding a suitable portfolio for them to which satiates their high-risk appetite and gives a high rate of return at the same time. They need to ensure that the portfolio should be under the accepted limit of risk-reward trade-off so that the client does not lose all their money.

One can see the Risk-taking behavior of investors investors or a risk taker entrepreneur in bullish market trends. These markets influence investors into thinking that there will be a continuous rise in the price of the securities, as they are encouraged by the financial market growth in the recent past. They also play a significant role in the market function of de-risking the market for conservative or risk-averse investors.

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Example

Let us look at a simple example to understand the concept.

Investor A has two investment options. The first one is fixed-income security which will give 15 % of annual return on a fixed basis, and the second one is market-linked security which will provide the return as per the performance of the market. The risk with the second investment is high, because if the market does not perform well, the investor may get nothing at all or even lose some of his money (negative rate of return).

Investor A is a calculated risk taker who loves the risk associated with the second option. Also, the investor perfectly understands that market growth can lead to a return even higher than the 15% on fixed income security. Investor A will choose the second investment option for the portfolio.

Characteristics

Some characteristics that define the nature of risk-takers in a broad manner, are detailed below:

Risk Taker Characteristics

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  • Market Fluctuations Interests Them: Risk takers are adventure lovers; they are intrigued with the market fluctuations and volatility and want to reap high benefit out of it even at the risk of the high potential of the loss.
  • Adaptive to Changes: They are good at embracing change and go with their gut-instinct for investing in the riskier alternatives.
  • Gambling Against the Odds: They love to gamble against the odds of risking everything to get the potentially high achievement or rate of return.
  • Learners: They are life-long learners; they would always research, test, or learn something to gather more information.

Functions

Some important functions of the concept are explained as follows:

  • The most crucial function of risk takers in the financial market is that by choosing to invest in high-risk options, these individuals de-risk the market for the investors with lower risk appetite. These individuals like to construct a high-risk portfolio, i.e. a portfolio with the significant portion invested in the high-risk investment option or alternative. So, when due to one or another reason the investors make a huge loss in their high-risk investment, they help de-risk things for everyone else in the market.
  • Such moderate risk taker provide liquidity to the market by trading in securities that normally many investors may avoid due to the risk factor. They participate in the market actively ensuring flow of funds.
  • They establish price efficiency in the financial market by continuously adjusting the prices based on demand, supply and market conditions. They also do detailed analysis of various financial instruments.
  • A risk taker entrepreneur assist in capital allocation by channelising funds from individual level to business level. This mobilize money and distributes risk throughout the market and capital is used for productive purpose.
  • Risk-takes helps in funding enterprises, leading to innovation, expansion and growth. This leads to employment opportunity and economic development.
  • They allow market participants to hedge their losses by using futures, options and other investment products by taking the risk on themselves. In the process the risk averse investors can transfer their own risk and take part in the functioning of the market.
  • They contribute towards, expansion, innovation and sophistication of the financial market because their ideas lead to creation and usage of new and better investment avenues that are customized to suit different kinds if situations in the financial market, trend adoption, technological development, etc.

Types

There are various types of risk-takers. Each of them are explained below in details.

types of risk-takers

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The three types of risk-takers are as follows –

  • Conservative Risk Takers: These investors do not like taking the risk. They would like to have a lower but fixed and secured rate of return on their investment. There will be minimal opportunity for growth in the investment portfolio of these types of investors as there will be almost no risk involved.
  • Moderate Risk Takers: These types of investors would like to take reasonable risk, i.e. they like to go on a balanced approach. A moderate risk taker would always like to grow their portfolio by taking some risks, but would not want the risk of losing everything.
  • High Risk Takers: These people are not scared of the potential of losing everything; they are even intrigued by the possibility of market volatility. They like speculating on the market fluctuation in expectation of getting a high rate of return.

Risk-Taker Vs Risk Averse

Let us look at some basic differences of both the type of investors mentioned above:

  • The high risk takers prioritize preservation of assets and limiting loss whereas the former uses their assets and is ready to incur loss with the expection of huge gain.
  • The risk taking ability of the former is very high and the opposite is the case with the latter.
  • The high risk takers embraces uncertainty and excitement and challenge motivates them, but the latter is motivated by security and certainty of investment return. `The former helps in mibilizing funds in the financial market whereas the latter leads to keeping funds idle and underutilized even though there may be good opportunities for investments.

Thus, the above are some differences between the two types of investors.

Frequently Asked Questions ( FAQs)

Why do people become risk-takers?

People become risk-takers for various reasons, such as a desire for growth and achievement, a passion for innovation and exploration, a competitive nature, or a need for excitement and challenge. Some may also believe that taking calculated risks can lead to better opportunities and outcomes.

What are the potential benefits of being a risk taker?

Being a risk taker can open doors to new opportunities, foster personal growth and development, and lead to significant achievements and rewards. It can also cultivate resilience, adaptability, and problem-solving skills, which are valuable in dynamic and uncertain environments.

What are the potential drawbacks of being a risk taker?

Being a risk taker carries inherent risks of failure, financial loss, or adverse consequences. Moreover, the outcomes of risk-taking can be unpredictable, and not all risks pay off. Therefore, it requires careful assessment and management of risks to avoid excessive losses or adverse effects.

Can risk-taking be learned or developed?

Yes, risk-taking can be learned and developed to some extent. While some individuals may naturally exhibit risk-taking tendencies, others can cultivate risk-taking skills through education, experience, and exposure to challenging situations. Developing a balance between calculated risks and risk management strategies is essential.

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