Risk-reward spectrum. All of you would have heard from it finance, economics or really any other business courses at school or university. We all know what it means in general. Risk-reward curve is a directly proportional relationship where, as the risk increases, the potential reward increases.
What many need assistance with, is how to effectively apply this concept to our financial worlds. As all of us delve into online banking, automated trading and the world of FinTech, we need to understand carefully the risks involved at this point of time. We understand the rewards – Less time spent, simplicity, user-friendliness and better performance.
Let us take two cases, the world of the stock market and that of technology. When it comes to technology, the risks are that most nations haven’t adapted their financial regulations to cover the activities of FinTech companies. This means that certain facets such as online banking, payment transfers and insurance through FinTech is still going through the process of approval in many countries.
As such regulations are debated at national level, users already use apps and web platforms that help with their finances. FinTech solution providers do have risk management solutions, and try to cover for any losses incurred whilst using their platforms. But as users, we can never be too careful. Reading through the entire terms and conditions of a FinTech platform is the first place to begin. In addition, obtaining as many reviews from users within your legal jurisdiction helps.
When it comes to the stock market, the risk-reward spectrum is more straightforward. Risks involve stock volatility, unpredictability in terms of company performance and management, unpredictability in terms of EBITDA and Capital investments that can erode cash etc. With so many variables that cannot be controlled, how do we effectively manage risk and still reap the benefits of high rewards?
Really, the best thing to do is learn as much as possible about the company, in terms of historic performance, management strength, commitment to innovation, shareholder opinions, exposure to uncertain geographies (if any) and so on. You should also keep track of financial indicators such as Earnings per Share (EPS) and Price to Earnings ratio (P/E). And finally, go through annual investor reports to get a refined idea of the company’s balance sheets and income statements.
Ultimately, preparation and learning are key to effective risk management, when it comes to technology and the stock market. You may still get it wrong, but you reduce the probability to getting it wrong.