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Risk Neutral Definition & Meaning

What Does Risk-Neutral Mean as an Investor?

Sometimes when it comes to investing, you may here some investors who are somewhat irrational and is too carefree to their own good. That is what most investors call risk neutral. Why? Well, because the investor will actually ignore the risk when making their decision to invest in something. The reason why they succeed though is because they’re not worried about risk, but why? We’ll get into that in a bit.

Being Risk Neutral Has a Science Behind It

It is not the same as being risk averse, which is someone who doesn’t like risk. At the same time, the investor isn’t searching just for something that has risk, it’s just that they’re not worried about it. A lot of times, it’s because they’ve carefully weight every single level of risk and assessed that their return will be far greater than the actual risk that is involved. For example, if there’s a 20% chance that their business investment will fold and they will lose 10 percent of their returns on the matter, they still have an 80 percent to come out on top. It’s not that they’re looking at it as a risk, but the risks just don’t matter when it comes to the initial investment because they have the confidence in their ability to make the return on investment.

Not only that, but they may end up getting less of an increase in the first term, however they know that they’re investing in a market that’s going to increase, so rather than worrying like a risk-averse person who would pass it up and choose a 100% certainty of return, they know they’ll eventually come out on top.

Is it Dangerous to Be Risk Neutral?

If you don’t know what you’re doing, this can surely be a risky move (the pun was totally intended), but if you’re wanting to accept that the risk is there, but know how to succeed and push through the risk then you’ll know what you’re doing. Basically this is the same as doing your homework, and having some blind faith, as well as skill, because there isn’t a guarantee of return that you’re wanting. Sure, we all want to know that we’re going to get a 100 percent certainty that our investments will increase in a year, but you know it’s not going to hurt if one year it’s three times more, and the year after that it’s only going to bring you half of that.

Conclusion

Being Risk Neutral is actually a common practice in many people who’ve succeeded today, from social media giants, all the way to software companies. As a matter of fact, there was a chance that the famous makers of “The Facebook” (the original name of the college Facebook website), Microsoft (which started out as a small no-name company), and even Steve Jobs (Who first started the Apple 1 computer that would later become the Mac Pro’s we know today). They basically knew that there were risks, but they believed in their products, and their returns. By doing so and carefully researching their gains, they were able to make multimillion dollar investments, and now even Mr. Gates himself is worth 103 billion, with innovative leaders Jeff Bezos and Mark Zuckerberg trailing in net worth shortly behind.

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