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Everyday we are exposed to some kind of a risk - whether it is walking down the road, driving, financial planning, investing or something else. But does that mean that we stop taking risks?
Willingness to take a risk is more of a psychology than it is about financial circumstances. Factors that affect the risk appetite of a risk taker are family information, personal information, and financial information.
If the risk appetite and investing objective are clearly established and every financial and other goal that matters are clearly constructed, then the entire investment process has clarity.
Factors that can affect Risk Appetite :
1) Family Information - Investment capacity is directly affected when the risk appetite increases as the number of earning members increases and decreases when the number of dependents increases. Risk appetite is also considered to be higher when the life expectancy is longer.
2) Personal Information - Factors like age, employability, nature of job, knowledge about the markets, and psyche also have a huge impact on the risk appetite of an individual.
3) Financial Information - Financial information of an individual depends on two things: one’s financial base and regularity of income. It is considered that the higher the financial base of an individual, the better the ability to handle downsides. People with regular income can take more risks compared to those with unpredictable income.
When an individual has a basic understanding of his/her risk capacity, then it becomes easy to achieve the investment objective in the Global Market. Risk Appetite helps an individual understand whether to invest in large-cap or small-cap companies.
When an individual does not want to take major risks, they are recommended to invest in large-cap companies as they are relatively safer. Higher risk appetite may lead to investing in mid or small-cap companies.
With clarity in objectives, the investment structure becomes more aligned with long-term financial goals.
Risk Appetite is one of the important factors to understand the time period of the investment in the Global Market. While investing, it is critical to consider risk appetite and plan the trading journey accordingly.
Long-term investors with higher risk appetite may choose aggressive instruments, while low-risk individuals may lean toward safer and stable assets.
Time horizon and risk appetite together guide proper portfolio allocation.
A thorough understanding of the company and its fundamentals is important before starting the trading journey. Risk appetite helps an individual understand their financial capacity and frame a trading plan accordingly.
Micro factors like supply and demand, investor sentiment, interest rates, company performance, and global events, along with macro factors such as GDP, inflation, and unemployment rate, impact the market and trading decisions.
Even after assessing risk appetite, it is always recommended to consider these factors due to their volatile and unpredictable nature.
Knowing the risk appetite goes far beyond being able to sleep at night or simply stressing over trades. The ultimate goal of knowing the financial position and then investing in the Global Market is achieved with an understanding of all factors while trading. Get research-based recommendations and be a responsible trader. Happy Investing!
Disclaimer : All content provided is for informational purposes only, and shall not be relied upon as financial/investment advice. Neither onefinancials nor its employees have a holding or any sort of interest in any stock recommended. Although best efforts are made to ensure accuracy, errors or misprints may occur.