Risk Taker

Risk Taker

What is a Risk Taker?

Definition

In a financial context, a risk taker is someone who makes an investment that could result in a loss, but which has the possibility of providing a high rate of return.  

What does risk taker mean?

All investments carry a certain degree of risk. For example, if you buy stock in a new company, you could lose all your money if the business closes down. On the other hand, you could make very high returns if the new venture succeeds.

Some investments carry a very low degree of risk. Treasury bonds (T-bonds) that are guaranteed by the U.S. government are virtually risk-free. But they will provide a return of only about 2% per year.

A risk taker would usually opt for an investment in the stock market. While that could result in a loss, it also offers the possibility of a significant gain.

A risk taker understands the risk-return tradeoff. According to this principle, an investor sacrifices the possibility of earning a high return if there is an unwillingness to accept the increased risk that this carries.  

Example of a risk taker

Gordon Huxley, an individual investor, is a risk taker. He always invests in a manner that provides the opportunity to make an above average rate of return. But this investment strategy carries substantial risk.

About five years ago, in July 2013, Gordon decided to invest $100,000 in Amazon stock. At that time, the share of the company was priced at $285. His investment adviser told him that the stock was overpriced and it was entirely possible that it would lose value.

But Gordon saw great potential in the company. He was willing to take the risk of going against his investment adviser’s opinion.

Was investing in Amazon stock a good decision? Five years after he invested, Gordon sold his holdings in Amazon for $596,500, earning a whopping six-fold return. In the time since he had bought the stock, its value grew from $285 per share to $1,694. Gordon’s risk taking strategy had paid off.  

Summary

A risk taker could incur significant losses if the investment turns sour. But if a person is willing to take on a higher degree of risk, it is possible to earn greater returns.