Why do people invest in low-returns business?

That is a very good question. If there are businesses that give higher returns, why isn’t everyone flocking to buy their stocks, right?

That is because, there is such a thing as risks.

In the world of investing, there is a common rule that goes by:
– low risk gives low returns,
– high risk gives high returns.

Here’s Why.

But note that this relationship is not linear (straight forward / always true). Some companies with higher risk may give a slightly lower returns than one with lower risk. It is wise to understand that many factors affect risks and returns, but the overall scene is that we can expect high returns business to come with some amount of risk.

Risk appetite

You might not have realised this, but different people have different risk appetite.

Risk appetite, sometimes referred to as risk tolerance, is a measure of how much of their money an investor is willing to lose while hoping to gain from the possible high returns.

If an investor is not willing to lose any amount of money at all, that investor is said to have zero risk tolerance. If an investor is willing to lose a substantial amount of money, that investor is said to have high risk tolerance.

Most of the time, people who have little money are very cautious of where they put their money. They would be more fearful to lose their hard-earned money and thus, have lower risk tolerance.

Whereas, people who have plenty of money won’t mind losing a certain amount if there is a possibility they can gain even more. They are said to have high risk tolerance.

There is no level of risk tolerance that is better than another.

It is unique to a person and their situation.

So now, can you answer the question:

Why do people invest in low-returns business?

Answer:

Because high-returns business often comes with high risks, and not everyone has a high risk tolerance. Thus, low-returns businesses are attractive to investors with low risk tolerance.

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