Risk Capital is the amount of money that a business or person is willing to lose. This is a commonly used term in trading and forex markets. These are allocated funds for high risk investments as the maximum amount that an individual would be willing to completely lose. The obvious incentive to "put up" risk capital for another person or entity is monetary gain.
Investment specialists and forex brokers advise to only use risk capital for investments that are highly speculative with a large potential payoff. High risk investments generally involve a potentially catastrophic profit, so a good example of risk capital would be an investor who makes his or her funds available to a startup business that has strong growth potential. The funding is invested into the business, along with the hopes that the new company makes tremendous profits, knowing there is a risk that it won't.
A small-time example of risk capital is displayed through buying a lottery ticket. Although the payoff is potentially huge, the odds of my investment into the lottery succeeding are next to zero. So the amount of capital that I am personally willing to put forth into this speculative investment, and potentially lose, is $1. If the odds for winning the lottery greater, I'd probably invest more of my capital in trying to win.
In some cases, Risk Capital is equivalent to Venture Capital (VC).
When a start-up business is seeking risk capital or venture capital, they are seeking money from an investor to help grow or start their business. If the company presents a strong business plan and displays great potential for success, an investor will be willing to lend it start up money.
Likewise, if a business plan is presented but doesn't seem to have the ability for exponential growth, an investor is willing to risk little or no capital. No investor is going put most or all of their risk capital into a business that does not have huge growth potential. Innovative and strong business plans will get the most investment, even if though the investor risks losing all money invested.
Some people wonder why a start-up business would seek investors instead of taking a traditional business loan out from a bank. The answer is that regular lending institutions such as banks are not usually willing to take such large risks. Banks base future loans off of previous loans, and if one's start-up business is the first of its kind, a bank may find the innovative business too risky. This is where investors with risk capital or investment capital come into play.
If risk capital can be for funding firms with excellent growth potential, it can also be used to purchase currencies with excellent growth potential. Forex trading can be highly lucrative, yet highly risky. Investors who have disposable money may choose to invest in volatile foreign currencies (versus something like start-up business investments) on their
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