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Forex Trading| Article #230 : RISK VERSUS REWARD

In the previous installments of odds and ends, we touched on Forex trading and the benefits of Forex trading as opposed to the stock market. All of this made me think of the subject of risk versus reward, which is something that ultimately everybody should consider when venturing into any business plan.

There’s an old saying that goes like this. “It takes money to make money.” Now, given today’s Internet and some of the promotional methods that we now have available to us, this may not be as true as it once was. Certainly there are plenty of people using the “Bum Marketing” method of promotion who are making a pretty penny. And this method of promotion has virtually no cost to it at all.

However, when you’re talking about making an enormous amount of money, then you’re talking about something that is very difficult to do without some kind of capital or assets.

And then, even if you have a large sum of money, then there is always the issue of risk versus reward. To understand this concept, let’s take a fictitious subject. We’ll call him John Doe.

John Doe has $1,000,000 in his bank account. It is currently earning a whopping 1% interest compounded daily. At the end of a month, let’s for argument sake say he made $10,000 off of his money. Now, this is not a bad sum of money, but it’s not a fortune, certainly not for a $1,000,000 investment. Of course there is very little risk. Most banks are insured up to $100,000 for each account and how many banks close up shop? So there is little risk and little reward.

Now, let’s take John Doe and his same $1,000,000 and let’s invest them in an IRA. Maybe these are some mutual funds and bonds and a nice mix of investments. The monthly return is about 3%. Now, that’s about $30,000 a month, but there is more risk here as mutual funds can go down in value. Mixed portfolios are still pretty safe because they are quite diversified. This way if one fund goes down another will most likely go up.

Finally, let’s take that same $1,000,000 and invest it in the stock market. There’s a brand new company that just hit the exchange. Nobody knows for certain if this company is going to take off of totally tank. The stock for this company hits the market at $10 per share. You decide to buy 100,000 shares, or your whole $1,000,000 worth of stock. Let’s pretend there are no broker fees to keep this simple.

This is the greatest risk. The uncertainty of what this stock will do literally makes it so that we could lose all our money if the company goes belly up. On the other hand, if that same stock sores to $30 per share over the next 3 months, if we sold our stock at that point, we would make $3,000,000 or a$2,000,000 profit on our $1,000,000 investment. That’s a 200% return.

Ultimately, what you have to decide is how much reward you want and how much you are willing to risk for it.

How does this apply to Internet marketing?

People expect to join a $10 a month membership program and make $30,000 a month off of that membership. Think about the return on that investment. It’s astronomical.  Yet, for a $1,000,000 investment in a stock that we had no idea what would become of it, we were thrilled for a 200% return on our investment.

The lesson you need to learn from this is a simple one. You are only going to get a big reward with Internet marketing if you take a big risk, either in the form of spending a lot of money on promotion of a proven product, or the development of a new product that might not sell at all.

In other words, there are no free rides.

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