High-risk Investments

High-risk Investments

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High-risk Investments

Risk can be defined as the possibility to lose something that is valued through taking on certain activities that are meant to bring benefits or boost certain standards. Taking a risk therefore, means engaging in an activity that could make one lose some valuables in the process. A person that takes risks is quite aware of the consequences that may follow. They also know that they have less control of the business and that they are the ones paid last. For example, a person may put some money into an acting business. The person is told that he will be able to receive certain amount money after a given period of time. This person is aware that he may not receive that money if the acting is corrupted and it does not continue after a while or it is done to completion and no or very minimal sales are made out of it. A high risk investment is one that may involve losing a part of or all the invested resources (Pamane, K., & Vikpossi, A. E. 2014). It is classified as high risk when the loss incurred is more than average of the investment.

Why High Risk Investments

Despite the prior knowledge on the possibility of incurring heavy losses, many companies and individuals still opt for these kinds of investments. High risk investments have been known to bring a lot of returns once one agrees to take up the risk. Many think that one cannot get big profits if they do not go for high risks and that no success comes without taking chances. There is a saying that goes “no risk, no reward” and many investors have chosen to trust every word in it. Given that every activity occurs as intended, the investors are in return assured of receiving large returns. Individuals have always correlated positively risk and the rate of returns. It is a general believe that the higher the risk involved the higher the potentials of return. In addition to high rates of return, the process of buying and selling is easy. Also one earns from both the benefits and the dividends.

Others think that high risk investments suits young people and young companies. They believe that if they succeed, they will receive good returns to push them forward in their businesses. However, if they fail, they still have many chances to pick themselves up and start again. In this case, it is a classification of people and their tolerance to loss. It can be assumed that young people or young companies tend to be more tolerant than old ones. When it comes to risk taking and losses, some individuals tend to be more comfortable than others. High risk takers are seen to be aggressive and are satisfied with such risks in anticipation of high returns.

Risk Associated with Exchange-traded Derivatives What Brokers Might do to Minimize the Risk to Investors

An exchange-traded derivative refers to a financial asset that is traded under certain regulations of exchange and whose value is depended on another asset value. This kind of investment in becoming popular compared to the well-known over-the-counter trade. This is because individuals have realized some advantages that come along with it which include but not limited to standardization and ridding risk of defaulting. The exchange has its terms and other specifications standardized such that the investors can easily determine the levels of selling and buying. Since the exchange makes the parties involved the buying or the seller for each other, one cannot easily default.

This investment, despite its advantages, still comes with some limitations that those involved should consider before engaging. One disadvantage that affects every other investment is the market risk. People take up investments with the expectations of meeting satisfactory returns. However, there is always a potential of incurring losses and getting no returns from an investment. It is always crucial to analyze the kind of investment whether it is a high risk or low risk in order to determine the potential returns or losses that may be incurred.

Another disadvantage is counterparty risk. This is where one of the contractors defaults. However, this risk is much reduced with exchange-traded derivatives as compared to over the counter trading because in exchange trading a buyer is also the seller and the seller the buyer. To avoid parties defaulting the exchange trade should be well-regulated and the dealers should be trustworthy enough in order to improve contract performance. Liquidity risk has also been witnessed. This is where one of the contractors closes a derivative trade before it matures. It is important to agree on the contract time span and when it should be closed.

Challenges Related to Regulating a Complex Global Financial Firm 

The 2008-2009 world financial and economic crisis was the most severe and called for rethinking into financial regulation (Rakesh, 2011) (Richard 2014). Large Complex Financial Institutions (LCFIs) are financial institutions that engage in investment banking, commercial banking, insurance and asset management. If such institutions fail, they pose a systemic risk to the whole of financial system. As an institution grows to become large and complex, as its scope and span of operation increases, its evaluation and supervision becomes difficult. Majority of the major banks, for example, have a lot of subsidiaries which makes monitoring by supervisors quite hard. Another challenge is that the finance markets are becoming very dynamic, quickly responding to changes like innovations and other technological advances. However, supervision always lag behind such kinds of changes and therefore the more the advances the less effective the supervision becomes. The third challenge is the fact various factors influence supervision and regulation. These include the public and the private sectors that operate both at the national and the international levels that make it hard for the supervisors to guarantee financial stability.

Due to the above stated challenges, financial supervisors ought to be proactive and highly adaptive in order to deliver their mandate. They should have high levels of expertise, should be independent, transparent and accountable to be able to play their role. Regulatory firms also need to move along with technological and innovative changes. They should closely monitor such advances and their effects in the financial market to ensure that they have appropriate regulatory rules in place. There has been a general feeling that the more the institution becomes complex the more the regulatory rules are. However, this has been seen to cause a lot of confusion and challenges, making the regulators to realize the need of simple rules. Complex institutions require simple rules to avoid complications that may arise in the cause of supervision.

Financial Ethical Violations

Ethics refers to what is seen as morally right or wrong to individuals and society. It encompasses behaving in acceptable ways and doing is expected of us. As such, some examples of morally acceptable values include: being disciplined, integrity, respect for others, honesty and fairness. Financial ethics involves handling with integrity the property entrusted to financial firms by the investors. It involves the moral norms applying to every financial activity (Boatright, 2011). Ethics is important in that it ensures peace and harmony for people to co-exist and interact with one another.

Arthur Andersen was one of the largest audit and consultancy firm before its starting to fall in the late 1990s. The company had many clients both in the United States and outside with as many as 28000 employees. During this time, the company had been featured in many cases of business fraud by the clients it served. A fraud occurs when one party knowingly omits or misstates for his own benefits without considering the other party (Boatright, 2011). There were many instances of accounts misrepresentation and the company was penalized by Securities and Exchange Commission (SEC). In many occasions, the company had settled claims from investors but did not acknowledge the acts of fraud on its part. One of its clients named Enron was under investigation for illegal money handling practices when the US Department of Justice came to know that Arthur Andersen had destroyed very important documents relating to the case. The company was indicted for trying to sabotage the Enron case. As a result, most of its clients and employees left.

In such situations, I think the company CEOs should be held responsible for what happened under their leadership. This is because they know or should know if there is any form of fraud happening within the company. The CEOs understand how money is flowing in and out of the company and how every business is conducted. In most cases, the CEOs are aware of what is going on but due to greed and desire to enrich themselves through mischievous means, they themselves cover the illegal actions being done. Each institution is governed ethics and moral values. I think that the moment these values are violated and the investors are affected, the CEO should be answerable. The investors put a lot of trust in the companies they invest in and they expect that their assets are well taken care of. For the case of Enron and Arthur Andersen, for example, Kenneth Lay, Enron CEO, was convicted and was to be jailed for 45 years, which I think was fair enough. They should also meet the losses incurred by the complainant. Such CEOs should not be allowed to take any other form of leadership when their jail terms end.

Any broker is suppose to act at the interest of the investor; to make the investor’s assets earn more assets and earns fairly for doing the job. However, there are times when the brokers put their own financial interests ahead of the investor’s thereby championing a case of financial fraud. Despite the big number of honest brokers and financial advisers, there are a few who have caused investors to lose their investments quite often. The sad truth is that a bad image is painted on all the brokers. It becomes hard for them to convince people or companies to invest in them. High risk investments involve using a lot of money which means heavy losses when fraud occurs.

It is possible for a business to lose large amounts of assets because of fraud. At extreme scenarios, a company could be shut down. Cases of financial fraud bring negative consequences to the whole financial market. Investors end up incurring heavy losses and consequently related businesses are brought down. Once a company is convicted of fraud, investors will leave and so are the employees. It also instills fear on those who were yet to start making financial investments.

It is extremely important that the brokers assure the investors of no likelihood of fraud. They should put the investor’s financial interests first. They should ensure that the companies that they work on their behalf have the employees treated fairly and paid satisfactorily. Every transaction should be clear and avoid any complexities, should be organized and be carried out by the right personnel. Decision related to transactions should be centered to one but distributed among the right company management staff.

Cases Where Use of High-risk Investments would be Beneficial for the Investor

As defined earlier, a high risk investment is one that there is a possibility of under-performance or one in which the investment that is lost is greater than average. People opt for such investments due to the chances of heavy returns. There is a general believe that risk is directly proportional to returns.

Even though sometimes the outcomes of an investment were never expected, it is possible that the investors can influence the returns. It is important to understand what one is getting themselves into, to understand the business operations as well as business and market trends. Putting a lot of money into a business requires one to be well informed on what they are indulging in. Failure to have prior knowledge can lead to one being defrauded.

High risk investments mostly suit long term type of investments. Those individuals having with long term financial goals have higher chances of making a lot of money through investing in assets of greater risks such as bonds or stocks. With long term one is also able to apply ‘dollar cost averaging’. This is where the investor puts in a certain amount of money at a given time over a certain period instead of contributing a lump-sum only once. In this case, the investor is able to buy more when the price is low and less when high.

High risk investments also require one to diversify their investments. It is more risky to put all the investment to one business or company such that if the business or the company goes bankrupt it goes down with all the money. High risk investors should carefully consider the businesses to distribute their investment. In such a case, if all the businesses do well, returns will be high. Chances of all the business failing at the same time are very low and the investor is able to get good returns at any given time.

References

Pamane, K., & Vikpossi, A. E. (2014). An Analysis of the Relationship Between Risk and Expected Return in the BRVM Stock Exchange: Test of the CAPM. Research in World Economy, 5(1), 13.

Rakesh M., (2011). Emerging Contours of Financial Regulation: Challenges and Dynamics. ADBI Working Paper 271. Tokyo: Asian Development Bank Institute. Available: http://www.adbi.org/working-paper/2011/03/25/4495.emerging.contours.financial.regulation/

Richard H., (2014). The Challenge of Resolving Cross-Border Financial Institutions, 31 Yale J. on Reg. Available at: http://digitalcommons.law.yale.edu/yjreg/vol31/iss3/10

John R., (2018). The SAGE Encyclopedia of Business Ethics and Society. Ethics in Finance. SAGE Publications, Inc. Thousand Oaks