HomeProductsAccountingRisk Averse: Definition, Types, Benefits, and Disadvantages

Risk Averse: Definition, Types, Benefits, and Disadvantages

Making financial decisions through financial control is very important for a company to avoid bankruptcy. In maintaining a company, you often face a situation where you need investment to advance your company. The investment decision will undoubtedly bring profits or losses that the company will face. In an investment decision, your risk preference will be a factor that influences decision-making for the company. One of the risk preferences in investing is risk averse.

Risk-averse decision-makers tend to choose low risk and are willing to sacrifice in calculated amounts to reduce the number of other risk variations. Risk-averse can be your choice of risk preference in deciding on a policy in the company to avoid losses. Before becoming a risk-averse decision-maker, you need to know more about the understanding and benefits. Check out the article below!

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Risk Averse Meaning

When discussing an investment strategy, risk-averse is a term you may hear and refers to the level of risk you want to receive. Risk averse meaning refers to investors who avoid taking significant risks in their investments. People who invest tend to avoid high risks, even if the profits are small. Because of this, investors prioritize security guarantees as long as they do not experience losses. You must determine how much risk you want to take in exchange for a higher potential return when you invest. 

In investing, risk equals the volatility of a particular opportunity. Volatility is a measure of the ups and downs of a particular security or index over a given period. For example, suppose a stock rises at a rapid rate. In that case, businesses view it as unstable rather than slow-increasing over time. When you invest, the volatility of the investment ultimately determines the return or return on that investment. Low-risk and stable investments guarantee some return, although they are usually not very high. However, most low-risk investments provide reasonable returns that may match or even slightly exceed the inflation rate. Risk averse investors will evaluate the risks associated with investing, including the volatility of each opportunity. If you have a risk averse preference, you are generally uncomfortable with high-risk investment options.

Types of Risk Averse

risk averse investment

Being a risk-averse investor means that you will choose stable investment opportunities and low volatility. However, by lowering the risk tendency, the possibility of profit will also decrease. You can also utilize best fintech ERP in Singapore to optimize your daily finance business efficiently. In the global market, there are many types of investments that you can choose to support the company’s finances. Here are two types of investments that can be your choice as a risk averse investor:

Safer (low-risk investment)

The first type of investment that becomes a risk averse option is a safer and low-risk investment. Low-risk investment is an investment that is inherently safer than others. Here are some examples of low-risk investments:

  • Corporate Bonds are debt guarantees that companies issue to sell to investors. The bond issuer will pay back the principal and interest coupon at the maturity of the payment, with a level of yield during the term of the bond. 
  • Certificates of deposits (CDs) are financial products offered by banks and other financial institutions that provide premium interest rates for a fixed term and withdrawal date. 
  • Treasury securities are government bonds to finance government spending as an alternative to taxes. It is also considered one of the safest investments.
  • Life insurance is a contract between an insurance policyholder and an insurance company. The company will pay a certain amount of money to the heir after the death of the insurance policyholder in exchange for the premium payment.
  • Saving accounts: Banks and other financial institutions offer savings accounts that store the owner’s money by providing a fixed interest rate. This investment offers slow but steady growth.
  • ETFs are mutual funds in the form of collective investment contracts whose participation units are traded on the stock exchange. This investment combines mutual fund elements in fund management with a stock mechanism in terms of buying and selling transactions.

Higher risk investment

High-risk investment opportunities often offer investors the potential for greater returns in return for accepting the associated level of risk. Some higher-risk investments are also risk averse options for making investments with a dose still safe. Here are some examples:

  • Mutual funds are investment products in the form of a collection of funds that companies manage as investment capital to convert into various types of products, such as stocks, bonds, and other financial and investment products.
  • Stocks are proof of ownership of a company’s value or proof of capital participation. Although this type has a high risk, this investment is the most popular among investors because it can provide an attractive profit level.
  • Penny stocks refer to the type of stock that trades at a relatively low price and has a low market capitalization. These stocks have high risk due to lack of liquidity and the risk of large fluctuations in value due to purchases or sales by more prominent investors.
  • Commodities are investment activities in products or raw materials that can be traded or exchanged for other goods with a commensurate value. Usually, commodities are not a good choice for individual investors because of their large nature, but many businesses depend on them.

Related article: Mutual Funds: How It Work, Purpose, and Types

Benefits of Risk Averse

After knowing the type of investment risk you can choose, you may start to be interested in starting an investment. If you are starting to enter the investment world, you can choose the risk-averse preference to be safer. You don’t need to worry because being a risk-averse investor will still give you many profits. Here are some of the benefits you will get from the risk averse:

  • Lower risk: Being a risk-averse investor makes you more careful in investing capital, hence choosing a safer investment. Therefore, even though the profit is low, the risk you get is also very small and is not even risky at all.
  • Guaranteed security: Choosing the type of investment that rarely suffers losses will make the level of security of your investment higher. You can live life quietly without fear of getting lost because the money you invest provides a guaranteed return.
  • Constant returns: You can enjoy a constant return on investment of almost the same amount and avoid losses.
  • Regular and definite income: Risk-averse investors also get regular and definite income. This is because you are investing funds in an instrument with a small profit opportunity, but it is certain and clear.

Disadvantages of Being Risk Averse

Disadvantage

While there are many benefits of being risk-averse, there are still some disadvantages that you will still get. Taking a safe investment and a small risk indicates that your investment may be less than the maximum. Here are some disadvantages of being risk averse:

Lower-income 

By choosing a low-risk investment, you will also make a small profit. For those of you who have the goal to enrich themselves through investment, being a risk-averse who earns low profits may be less enjoyable.

Loss return opportunities

The next drawback is that you will miss out on more return opportunities due to the unpreparedness to take significant risks. The returns that investors get may be about the same because there is no increase in returns or a slight increase in returns you can see. In addition, the increase in the rate of return for risk-averse investors is entirely dependent on inflation, which means the rate of return increases only when there is inflation in the country.

Less Training Investment Ability

Choosing risk-averse preferences will make you less trained in investment skills because it always plays safely. Risk-averse investors are less like challenges and tend to invest in safe instruments, so their investment capabilities are less honed. You might also use the most refined competency management system to improve your skills, especially in investment ability, so that you meet what the company desires. 

Related article: Investment Ideas for Companies During the Coronavirus Crisis

Conclusion

In an investment decision, your risk preference will be a factor that influences decision-making for the company. Risk-averse meaning refers to investors who avoid taking significant risks in their investments. People who invest tend to avoid high risks, even if the profits are small. As a risk-averse investor, you can choose two types of investments to increase your company’s profit: safer (low-risk investment) and high-risk investment. However, you have to choose which investment is suitable from the available investment options for your company. By choosing the right type of investment, your company can avoid bankruptcy and increase the company’s profitability. Therefore, you need an Accounting System from HashMicro to manage your company’s finances and investments.

HashMicro’s Most Integrated Accounting Software is an online accounting system specifically designed to facilitate the work of accountants in recording business transactions that employees usually do manually. This system will help you track all transactions, including your investment. You can get many benefits, such as optimized efficiency, real-time data, improved accuracy, and increased profitability. You can use this software to help you choose the type of investment that suits your risk averse preferences to increase the company’s profits. In addition, you can also evaluate your investment profitability in this system. Contact us now and get a free demo!

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Femri Resdifianti
Femri is an explorer who sails through all kinds of seas of writing in search of a treasure trove of new knowledge. She likes to express her complicated thoughts in writing - a content writer at HashMicro.

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