Risk Taker Meaning Examples Functions Types

Risk Taker Meaning

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 behavior of investors 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 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 returnAnnual ReturnThe annual return is the income generated on an investment during a year as a percentage of the capital invested and is calculated using the geometric average. This return provides details about the compounded return earned yearly and compares the returns supplied by various investments like stocks, bonds, derivatives, mutual funds, etc.read more 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

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Market Fluctuations Interests Them: Risk takers are adventure lovers; they are intrigued with the market fluctuations and volatilityVolatilityVolatility is the rate of change of price of a security. It is measured by calculating the standard deviation of annual returns and giving out minimum and maximum price. read more 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

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

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:

They need to find a portfolio for their client, 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-rewardRisk-rewardThe risk-reward ratio is the measure used by the investors during the trading for knowing their potential loss to the potential profit. Hence it is used by the traders for effectively managing their risk and capital during the trading process.read more trade-off so that the client does not lose all their money.