Risk Taker

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. By investing in high-risk investment options, they de-risk the market for more conservative investors.

Explanation

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 returnRate Of ReturnRate of Return (ROR) refers to the expected return on investment (gain or loss) & it is expressed as a percentage. You can calculate this by, ROR = {(Current Investment Value – Original Investment Value)/Original Investment Value} * 100read more.

One can see the Risk-taking behaviour of investors in bullish market trend. 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 marketFinancial MarketThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read more growth in the recent past. They also play a significant role in the market function of de-risking the market for conservative or risk-averseRisk-averseThe term "risk-averse" refers to a person's unwillingness to take risks. Investors who prefer a low-return investment with known risks to a higher-return investment with unknown risks, for example, are risk-averse.read more investors.

Example of Risk Taker

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 risk taker individual 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 of Risk Takers

Risk Taker

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Functions

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.

Types of Risk Taker

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. They 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.

Dealing with Risk Takers

As we know by now that risk takers do not like conservative investment portfolios or techniques. The financial advisors who are dealing with these individuals need to undergo a lot of work in finding a suitable portfolio for them to serve the following purpose:

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