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Business Risk - He Who Dares, Wins?

Nov 18, 2007
Business Risk - he, who dares, wins... right? When making an investment of any kind, one key factor that needs to be looked at is risk versus reward. More importantly, how much risk can you handle? A person's risk tolerance is closely linked with their willingness to invest.

So what is "risk"? In the context of business, "risk" is a concept that assigns a possible negative impact to an asset or something of value that may arise from some present process or future event. In everyday usage, "risk" is often used with the probability of a known loss.

Here is an example; if I invest my savings into something that could generate a profit for me, what is the possibility that I could loose some of it or even all of it? This is a very simple way of looking at it. For some people, the possibility of even losing 10% might be too much. If it is, clearly the risk is too high. For another person, the risk may be too low and would be prepared to loose all of it for potential profits.

This brings us to the risk versus reward scenario. Risk and reward go hand in hand and the potential reward and the probabilities may be high enough for you to raise your level of risk. In business, there is a constant battle of finding that balance between these two opposing forces.

Generally, the less the reward, the lower the risk and vice versa, although this is not always the case.

Here are a couple of examples;

1. A stock investor speculates on the stock markets and knows that if the markets move in his direction, he may be able to double or even triple his money. Conversely, he may stand to loose the lot or even a large portion of it if the market runs against him. He is prepared to take the risk because the lure of large financials gains and the pleasure he may get if he profits far outweighs the pain he will feel if he looses. Clearly he has a high risk tolerance.

2. A property investor knows of a property that will give him a small profit he purchased a house and sells it in 3 months after renovation. The investment is high but the chance of losing is very low and even if he does, the amount relative to his investment is only a small portion. This kind of investor has a low risk tolerance.

So what factors determine your risk tolerance? There a number of factors but the main ones are:

1. How much assets does your business have to risk? This will also determine the investments that can be examined.

2. Are you the kind of person who like the thrill of seeking large profits or would you prefer a slow and steady growth but with less returns?

3. What is your time horizon? Do you have to cash in very quickly because your money is under demand from other areas?

4. Are you someone who constantly worries and even looses sleep over your financial situation?

5. Is everything just a big game for you?

Whatever answers you come up for the above, it is critical that you understand and work within what is comfortable for you. Once you have assessed your risk levels, you can then go about seeking investments that fall within your risk / reward scenario!

I will leave you on one last comment - 'he who dares wins' or maybe I should say 'look before you leap'!
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