Page 4: Risk and reward
Often in business there is a positive relationship between risk and reward. In simple terms, the greater the risk you take the more potential there is for high profits. However, there is also the possibility of making spectacular losses. The graph illustrates this relationship.
The risk averse person does not take many risks and is unlikely to make a large profit or loss. The risk taker is likely to make a much larger profit but may also make a larger loss.
Peter took on an enormous risk when he left his secure job to set up his own business. He took another risk in using his own capital in his new venture. However, Peter lowered the risk by conducting market research. He talked to potential customers to see if they were willing to subscribe to his service and how much they were willing to pay. Peter was used to managing risk. For nearly 20 years he had been operating as a foreign exchange trader. He was used to making instant decisions involving risk and often found common sense the best method. To take too big a risk was foolish.
Peter believes the secret of balancing risk and reward to achieve business growth lies in a number of key factors:
- Take risks but spread them. CMC offers many types of financial trading opportunities in addition to foreign exchange.
- Make sure to have a regular income coming in.
- Work hard.
- Keep control of the business.
- Have as wide a customer base as possible.
- Keep introducing and pushing through new ideas.
- Think laterally new and non-conventional ideas.
Peter also considers the opportunity cost in making high risk decisions. The real cost of making any decision is the value of what must be given up to fulfil that decision (the next best alternative). For example, when Peter chose to set up CMC Markets, he gave up the opportunity of promotion and secure income. He believed that by setting up in business he would gain rewards that would more than compensate for the alternative sacrificed.