What is 'Risk Capital'

Risk capital consists of investment funds allocated to speculative activity and refers to the funds used for high-risk, high-reward investments such as junior mining or emerging biotechnology stocks. Such capital can either earn spectacular returns over a period of time, or it may dwindle to a fraction of the initial amount invested if several ventures prove unsuccessful, so diversification is key for successful investment of risk capital. In the context of venture capital, risk capital may also refer to funds invested in a promising startup.

BREAKING DOWN 'Risk Capital'

The more risk averse the investor, the lower the proportion of risk capital allocated in the total portfolio should be. While young investors, because of their lengthy investment horizons, can have a very significant proportion of risk capital in their portfolios, retirees may not be comfortable with a high proportion of risk capital.
Risk capital should be funds that are expendable in exchange for the opportunity to generate outsized gains. It is money that can afford to be lost. Investors must be willing to lose some or all of their risk capital. It should account for 10% or less of an investor's portfolio equity and should be offset with more stable diversified investments. Speculative investing should be segmented to the early years of investing and cordoned off as retirement age approaches. Investment objectives may also change as participants start to rely more on fixed-income sources.

Uses of Risk Capital

Risk capital is commonly utilized with speculative investments and activities. If the risk is more than proportionate to the reward, then risk capital may be considered. Investors and traders should try to accurately assess the risk prior to any investment or trade. Risk capital is often used for speculative investments in penny stocks, angel investing, lending, private equity, initial public offerings, real estate, day trading and swing trading of stocks, futures, options and commodities.


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