Risk is the eventuality of a negative outcome. It is the probability of having an undesired result.You cannot eliminate risk but you can curb it to the bearest minimum.
Risk management is the process of identifying, assessing and controlling threats to an organization’s capital and earnings. These risks stem from a variety of sources including financial uncertainties, legal liabilities, technology issues, strategic management errors, accidents and natural disasters. A successful risk management program helps an organization consider the full range of risks it faces. Risk management also examines the relationship between risks and the impact they could have on an organization’s strategic goals.
Positive risks are opportunities that could increase business value or, conversely, damage an organization if not taken. Indeed, the aim of any risk management program is not to eliminate all risk but to preserve and add to enterprise value by making smart decisions.”Differences include: how readily investors can get their money when they need it, how fast their money will grow, and how safe their money will be. In this section, we are going to talk about a number of risks investors face. They include:
Business Risk.
With a stock, you are purchasing a piece of ownership in a company. With a bond, you are loaning money to a company. Returns from both of these investments require that that the company stays in business. If a company goes bankrupt and its assets are liquidated, common stockholders are the last in line to share in the proceeds. If there are assets, the company’s bondholders will be paid first, then holders of preferred stock. If you are a common stockholder, you get whatever is left, which may be nothing.If you are purchasing an annuity make sure you consider the financial strength of the insurance company issuing the annuity. You want to be sure that the company will still be around, and financially sound, during your payout phase.
Volatility Risk
Even when companies aren’t in danger of failing, their stock price may fluctuate up or down. Large company stocks as a group, for example, have lost money on average about one out of every three years. A stock’s price can be affected by factors inside the company, such as a faulty product, or by events the company has no control over, such as political or market events.
Inflation Risk.
Inflation is a general upward movement of prices. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of return.
Interest rate changes can affect a bond’s value. Rising interest rates will make newly issued bonds more appealing to investors because the newer bonds will have a higher rate of interest than older ones. To sell an older bond with a lower interest rate, you might have to sell it at a discount.
Liquidity Risk.
This refers to the risk that investors won’t find a market for their securities, preventing them from buying or selling when they want. This can be the case with the more complicated investment products. By including different asset in your portfolio, you increase the probability that some of your investments will provide good returns even if others are flat or losing value. you’re reducing the risk of major losses that can result from dependency on one asset.
how to manage trading/investment risk.
We don’t manage risks so we can have no risk. We manage risks so we know which risks are worth taking, which ones will get us to our goal, which ones have enough of a payout to even take them,” Thus, a risk management program should be intertwined with organizational strategy. the amount of risk it is willing to accept to realize its objectives.Every saving and investment product has different risks and returns. The following are some ways to manage risk .
Diversification
When you diversify, you divide the money you’ve allocated to different asset class, Diversification emphasizes on variety, allowing you to spread your assets around. In short, you don’t put all your investment eggs in one basket.
Consider the One-Percent Rule
A lot of day traders follow what’s called the one-percent rule. Basically, this rule suggests that you should never put more than 1% of your capital or your trading account into a single trade. So if you have $100,000 in your trading account, your position in any given instrument shouldn’t be more than $1000.
Setting Stop-Loss and Take-Profit Points.
A stop-loss point is the price at which a trader will sell a stock and take a loss on the trade. This often happens when a trade does not pan out the way a trader hoped. The points are designed to prevent the “it will come back” mentality and limit losses before they escalate. For example, if a stock breaks below a key support level, traders often sell as soon as possible.On the other hand, a take-profit point is the price at which a trader will sell a stock and take a profit on the trade.
stop-loss and take-profit points is often done using technical analysis, but fundamental analysis can also play a key role in timing. For example, if a trader is holding a stock ahead of earnings as excitement builds, they may want to sell before the news hits the market if expectations have become too high, regardless of whether the take-profit price has been hit.
Hedging
buying a security to offset a potential loss on another investment and insurance can provide additional ways to manage risk. However, both strategies adds to the costs of your investment, which eats away any returns.