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Simplifying The Concepts Of Return On Investment And Risk

24th Nov, 2017

Let’s be honest; no one but accountants can look at a business’ balance sheet and smile. The reason is because, for the rest of us, a company’s financial information is simply undecipherable. Do not get stressed however: KCB has your back and today, we will simplify for you the most important financial metrics: Risk and Return on Investment (ROI).

Before we break it down with calculations and formulas, let us first understand what an investment is. Usually, there are two options available when you find yourself with disposable income: you can spend it and purchase a good or service. On the other hand, you can economize and put the money in a savings account. Saving money is a form of investment as you expect to earn an interest directly proportional to the amount you saved. This form of investment has the lowest risk, and consequently, the lowest returns.

There is an old adage that goes “high risk, high reward”. The difference between saving and investing is simply that saved money waits to mature and therefore is unused whereas invested money goes on to bankroll financial activities in a business. You can invest by buying stock in a large corporation, or simply even buying a generator for a small business.

Defined from a financial perspective, “risk” is the chance that your expectations of the investment will not match the results, for instance, you always risk losing a portion or even all of your finances, even when you back the right investment. In fact, all investments carry with them a financial risk which can be mitigated by diversifying your investment portfolio, rather than putting all your eggs in one basket. “Returns” are the actual gains or losses that result from investing money in a business venture. Return on investment is thus a way to measure the reward generated from your financial input. ROI can be calculated simply as (Profit ÷ Cost of investment) x100.

Here at KCB, we have been given a mandate to assist individual investors like you to manage their wealth and resources in a way that earns you a profit. We offer advisory and brokerage services via our KCB Capital subsidiary. Give us a call today and begin your investment journey.

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