Hello everyone, have you ever wondered how stocks and shares worked in the age of piracy? If yes then you're in the right place. A good example of how stocks and shares worked a long time ago was during the age of piracy (I’m serious). Ships, their crews and everything else that goes along with them are very expensive. So what would happen is that a captain would approach an investor asking for money and in return would give them a cut of whatever they looted on their travels.
Now if you’re the investor you’re taking a risk, what if the ship sinks? You’ll have lost a load of your money with no return at all.
To solve this the investors would work together and instead of buying a stake in just one ship, they’d all work together to buy say 20% of several ships. That way if one of them sank no one would lose everything.
Now imagine you’re the investor, you have a choice. You can either spread the risk out and accept the average return of all the pirate ships you’ve invested in or if you’re sure that one ship is going to be better than the others you could put in more or all of the money for that one but take a bigger risk of it sinking.
Spreading out your investments more takes more of an averages approach. This means that you’re less likely to get bigger returns and then will have less to put into the next pirate ship (i.e. slower compounding). However if you put too much money in 1 ship and then lose it you’ve lost a lot of money that is likely to set you back much more than if you’d just spread your investments.
It's about your choice and attitude towards risk in the end though.