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