Importance of knowing Risk Appetite

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.

Importance of knowing Risk Appetite

• Factors that can affect Risk Appetite
• Objective of Risk Appetite

Factors that can affect Risk Appetite

• 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.
• Personal Information - Factors like age, employability, nature of job, knowledge about the markets, psyche also have a huge impact on the risk appetite of an individual.
• Financial Information - Financial information of an individual depends on two things; Capital Base and Regularity of Income. It is considered that the higher the capital base of an individual, the better the ability to financially take the downsides that come with risk. It is also considered that people earning regular income can take more risks as compared to ones with unpredictable income streams.

Objective of Risk Appetite

• Structure of Portfolio - When an individual has a basic understanding of his/her risk capacity, then it becomes easy to achieve the investment objective in the stock market. Risk Appetite helps an individual to understand whether to invest in large cap or small cap. When an individual does not want to take major risks, s/he is recommended to invest in large cap companies as they are relatively safer form of equity investments and vice versa.
• Time Horizon - Risk Appetite is one of the important factors to understand the time period of the investment in the stock market. While investing in the stock market, it is critical for an investment to consider the risk appetite and plan the trading journey.
• Fundamentals of a Company - A thorough understanding of the company and its fundamentals are an important aspect to be taken into consideration before starting the trading journey in the stock market. Risk Appetite helps an individual to understand the financial capacity and then construct a trading plan.
• Micro-Macro Factors - Micro-Macro factors affecting the stock market are very volatile in nature. Micro factors such as supply and demand, company related factors, investor's sentiment, interest rates, politics, current events, etc. affects the trading journey of an investor, along with macro factors such as GDP, inflation, unemployment rate, etc. Even after getting acquainted with the risk appetite, it is always recommended to the investors to consider these factors because its volatile and unpredictable nature.

Conclusion

Knowing the risk appetite goes far beyond being able to sleep at night or simply stressing over trades. But the ultimate goal of knowing the financial position and then investing in the stock market is achieved with an understanding of all the factors affecting while investing in the market and the objectives required to be taken into consideration while trading. Get research-based trade recommendations and be a responsible trader.

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Happy Investing!

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