Risk management is one of the most important aspects in investing in any market, but especially in the stock market. Without risk management, it would be very easy to lose a lot of money during investment or trading.
For example when trading stocks, risk management means knowing when you are trading too much risk for not enough reward. If you risk too much on the trade, then you will stand to make more money if it works out well for you. However, risk management says that if there isn’t enough reward associated with your risk being taken, don’t risk anything at all. For example, risky penny stocks have extremely high risk involved with them because they are so unstable . If you risk too much on such a trade, you risk losing all of your money. However, if there is enough risk/reward associated with the risk taken, then risk management says to take advantage and make as much money as possible.
For example in goody stocks like Amazon or Google , risk management would say that these companies are fundamentally sound and an investor could risk up to 20% of their portfolio in them. If something goes wrong, you won’t lose your whole investment; conversely, if it goes right, your percentage gains will be very high.
Risk management is not only associated with how much risk is involved in a trade, but when the risk is occurring within the market’s movements . That means for day traders, risk management is different than risk management for a long term investor. However, risk management is always about maximizing risk and minimizing risk to achieve maximum gains and minimum losses .
That means risk management involves taking the emotion out of investing and looking at numbers and scenarios —not feelings or hearsay —so you can make the best decision possible.
Now that we have looked at some examples of risk management in action, let’s look more closely as risk itself.
Risk comes in all shapes and sizes: it could be losing 5% of your portfolio one day, 10% another day; 20% another; or even 100%, Finally risk management is also heavily based on what type of market you are investing in . risk. For example, risk management for a biotech stock is different to risk management for a utility stock, even though both could be considered riskier investments.
When assessing risk, investors must look at the market they are dealing with . That means risk management for an emerging market will not be the same as risk management for developed markets or vice versa.
The risks associated with investing in any given market has to do with several factors . The first is the amount of volatility in that particular location’s stocks. Next is liquidity , which deals with how easily you can enter or exit that market without affecting its cost..
After that comes interest rates and macroeconomic factors , which deals more heavily on what companies are worth rather than their value once traded. However, risk management is always an important part of investing, and without it investors would be in a lot of trouble .