Definition: A risk taker is an investor or entrepreneur who is intrigued from the market volatility, viewing it as an opportunity to realize a higher return on their investment.
What Does Risk Taker Mean?
What is the definition of risk takers? Risktaker investors are seeking for greater market uncertainty and market fluctuations, and they often pursue short-term, growth investments in anticipation of a higher investment return. Unlike value investors who are risk-averse, thus pursuing large-cap, U.S. stocks, risktaker investors invest in small, caps, international stocks and emerging markets.
Of course, risk-taker investors are often drawn to situations that incur a higher risk and, therefore, they often realize huge losses. However, unlike risk-averse investors, risk takers are going for the higher risk, even for a lower return.
Let’s look at an example.
Example
John owns a retail company that seeks expansion to Africa. The financial manager of the company has submitted a proposal about investing in Johannesburg and Lagos. In his proposal, the company’s CFO stresses the fact that Africa is hosting some of the world’s fastest-growing economies, and that there is a growing middle-class that can significantly boost the company’s sales. The expected return on investment is 15% for $1,000,000.
John considers an investment of $500,000 in Johannesburg and of $500,000 in Lagos. Being a risk-taker, John takes into account the business risk associated with the investment decision. He calculates that the return on investment is $150,000, which in peanuts, but he loves the risk. He also believes that Africa has indeed a great potential.
Besides the business risk, there is also an economic risk as well as foreign exchange risk since the African currencies are relatively unstable and pegged to the US dollar. Moreover, the political situation in Africa is not stable, and such an expansion may face the opposition of the local government and officials. The political environment may turn against the company, or the government may impose new laws that may affect the company’s profitability.
John takes on the project.
Summary Definition
Define Risk Taker: Risktaker means an investor who is attracted to risk in hopes to increase his or her profit making abilities.
