Most of you would have heard of this popular saying “High Risk equals High Rewards.” Every time someone says that to me, I want to do a double face palm – on their face.
Not all risks are created equal. Lot of VCs or angel investors invest in hot startups (E-Commerce seems to be the flavour now). Everyone knows that startups are risky investments (riskier than investing in blue chip stocks). By the “High Risk, High Rewards” logic, if you invest in startups (high risk) you would get back lot of money (high reward).
But it is common knowledge that not all startups are successful. A startup’s default option is failure. Its only the top 1 or 2 which take up most of the market share and become big, earning multi-fold returns for the investors. What just happened? You took high risk, but you didn’t get the high rewards that was promised. But if you had done some research and invested in one of the better startups, you had a better “chance” of getting good rewards.
High risk = Higher potential for rewards.
This is what is true, but people skip the important word “potential”.
This logic can be applied to any investment, even in well established companies in the market. Investing in some low valued penny stocks is very risky. But do they give you high rewards? It is always better to take calculated risks, by investing in fundamentally strong companies, thereby increasing your potential for higher rewards.
Remember this the next time you go buy a stock. Instead of blindly taking risks, take calculated risks and reap higher rewards.