Risk and reward

Risk is the integral part of life. Every decision taken small or big have a risk factor associated with it. But the real question is what is risk reward situation.

People associated with financial institutions are quite familiar with this term because it is the part of there job profile. When bank grant loans the jugglery the loan officer do with number before announcing the rate of lending is actually the calculation of risk and reward. If someone have a stable job and assets which could be easily amortized to recover loan he/she would get loan at base rate but if someone have neither of these two there is a risk that he/she wouldn't get a loan at all!!! the primary reason is that the risk to reward situation is not in the favor of bank. 

Even in stock market risk to reward is the key driver, every trade big or small have a inherent risk associated to it. Whenever a call is given both target and stop loss are mentioned, the target is as important as stop-loss because it is the stop loss which determine the risk associated with that call. So there could be 3 scenarios:

1) Target - CMP > CMP - Stoploss 

2) Target - CMP = CMP - Stoploss 

3) Target - CMP < CMP - Stoploss 

Obviously in the first scenario risk to reward is the favor of the trading call and it would be advisable to take it but it is not that simple and various other factors are also involved in it. And these stop-losses and Targets are generally derived from the various statistical and graphical analysis which takes into account various triggers and factors. 

But when some decisions is taken in real life the calculation of risk to reward scenario become very complicated because it involve factors which are not know to us or are not fully defined. that why it is very critical to take informed decisions. Decisions based on correct information mitigate risk factor and improve risk reward situation

So the saying- " bigger the risk sweeter the gain" is basically "better the information, lesser the risk; and lesser the risk better the gain"