Investor risk profiles and which one is the most suitable for investing in the Vietnamese stock mark
There are many different ways to define the different risk profiles.
The simplest way to think about it is to think about three profiles: the Risk-Averse profile, the Risk-Neutral profile and finally the Risk-Seeking profile.
The risk-Averse profile is simply an investor who is scared about losing his or her investment. In a way, it could be argued that any investor is concerned about losing his or her investment but the Risk-Averse investor is even more concerned than the others are. For him or her, the fear of losing his or her investment in part or totally is much more important than anything else.
Let us illustrate this with an example. Let says that someone gives you 2 options.
Option 1: This person will give you $100 tomorrow.
Option 2: You accept playing a game. You flip a coin, and if you guess the right side, the person will give you $250 but if you are wrong, he or she will not give you anything.
A risk-adverse person will choose option 1, while a risk-neutral investor or a risk-seeking investor will both choose option 2.
The Risk-Neutral profile also has a strong fear of losing his or her investment but he or she is also excited about the possibility of making profits. A risk-neutral investor will make his or her decision mathematically. In our example above, the expected gain with option 2 is $125, which is superior to the gain realized with option 1.
The Risk-Seeking profile.
The idea of making it big appeals to you, even though you might also lose big. You would naturally lean toward Option 2, and the chance of winning $250. In fact, even if this amount was reduced to $200 you would certainly still choose option 2.
When it comes to investing in Vietnamese stocks, the two last profiles are perfectly fine.
However, if you are a risk-adverse investor, you should simply avoid investing in Vietnamese stocks because of the high risks involved.