What is profit and risk? Financial investor expects to earn a profit by passing its own capital, and the investment broker expects it while transforming the capital. Material Investor awaits profit from the sale of goods and services (will use part of the profit to pay a financial investor and the broker). Profit is the driving force behind the economy. It sets everything in motion. All operations related to the deployment of capital, its processing and subsequent placement will be referred to financial investments. Noting earlier that financial investment is to invest the funds in order to make a profit, you can now look at the broader financial market. In this way, the broker manipulating streams of financial capital in the pursuit of profit is also conducting financial investments. Thus, he becomes himself a financial investor.It should be mentioned yet another definition of the investors. We speak of a professional investors whose main occupation is to make financial investments (ie intermediaries: banks, investment funds, and insurance companies for example) and non-professional investors, for which financial investments are not the main source of income (eg households).
Profit and risk factor
What must be the profit to set in motion the power of capital? What is the return on financial investment? The expected profit must be sufficiently attractive to a financial investor, so in order to achieve it he’d made a financial investment. Profit needs to satisfy certain basic conditions. To make it attractive and able to force the movement of capital, it has to embody:
1. Remuneration for the fact that capital is lent. (Payment is required for the fact that someone’s savings hadn’t been spent all at once but given to someone who needs them at this moment).
2. Remuneration, which offset the harmful effects of inflation on the value of savings – capital. (If someone decided to create a certain amount of financial resources – capital, he doesn’t want it to lose value during the period when it’s borrowed. This threatens inflation).
3. Remuneration for readiness – the desire to risk capital loss during borrowing it. (By providing savings capital or broker expose themselves to the loss of funds. Willingness to take risks also must be rewarded. This remuneration is a premium for risk).
These are the three essential components of profit to be taken into account in the process of lending capital. It should be noted that for clarity – the profit is referred to as the concept of “income”. In general, they are not equivalent terms. Regardless of whether and how to define a financial investor for his own use elements of profit, it would be taken into account (not even knowing about it) in the decision to carry out financial investment. As profit is the engine of the capital market in the economy, so the risk acts as a brake in this market. Risk is the curse of any investment. Unfortunately, in the economy it can’t be completely eliminated. You can reduce or move it on to someone else, but it will remain. In some situations, the risk can paralyze the entire movement of capital in the economy. The economy, in which there is no movement of capital, is dying. So the risk is noteworthy component of the economy. It is impossible to isolate the risk of business. Earnings are moving capital – risk inhibits the movement of capital. It is therefore strong relationship between profit and risk in the economy.