Obviously, no one likes losing money, or feeling like they’ve been taken for a fool when an investment doesn’t play out the way they wanted. While it’s always slightly nerve-wracking to make a significant investment, you can’t expect any decent returns without at least some risk involved, so it’s important to manage and understand these risks. Those willing to lay their capital on the line stand to grow their investments, stocks, or pensions, but they also stand to lose more if things go awry. For this reason, everyone who invests or is considering investing should endeavor to understand how to maximize their returns relative to the financial risk they are taking.
One of the main factors to consider is the company’s CEO. Just as the pilot of a plane is responsible for the lives of those on board, a company’s CEO is responsible for his shareholders’ investments. These risks can hit all members of society. In late 2014, Wesley Edens of the Bucks gave financial advice to players in response to the amount of NBA players who fell into financial trouble during and after their careers. Edens is the co-founder and Chairman of Fortress Investment Group, a company worth over $62 billion.
Simple research into the CEO’s background can give you a good idea of the risk involved, combined with considering questions such as: “This guy ran a chain of retail outlets for the past ten years – is he suitable to run an airline for another ten?” Another important thing to consider is the company’s business model, essentially the strategy it uses to maximize its own profits. For example, Walmart’s business model hinges on having exceptionally low prices so that it can sell as much produce as possible. On the other hand, ventures such as Coach sell fewer, higher-quality products, but generate a greater profit for each unit sold.
When choosing to step into a new investment, it’s important that you carry out thorough and careful research to maximize the potential return. Risk in investment depends heavily on your personal circumstances. There are two main categories of risk that you should be aware of: systematic and unsystematic. Systematic risk is a major global event – for example, a natural disaster – which can have a significant effect on any type of asset, while unsystematic risk is specific to one company or industry – such as falling oil prices. Systematic risk is near impossible to guard against through research as it is often unpredictable. However, unsystematic risk can be avoided through careful study of the sectors and companies you’ve got your eye on.