Learn With ETMarkets: A complete guide to risk management in stock investing
risk. You see, the stock market is known for its volatile nature. Some investors take advantage of this market volatility, while some struggle to keep up with it.
For those who struggle with the roller-coaster ride of the stock market, experts often recommend diversification as a way to mitigate risk.
But is diversification the only solution? The answer is ‘No’.
Diversification can certainly help manage risk to some extent, but it is not the only tool available. Some other strategies and tools can also play a role in risk management.
Which tools are we talking about? Let’s understand that in today’s guide. But before that, let’s understand what risk management truly is.
What is Risk Management?
To understand risk management, you must first understand what risk is.
In the stock market, every rupee of profit in one portfolio translates to a loss in another.
When you are optimistic about a stock, there is someone who is pessimistic about it. And from the two sets of people, only one view will be correct. In simple terms, the stock price can either go up or go down.
If one makes a profit, the other would lose.
So, the risk ratio is 50-50, and that is the risk we are talking about.
As an investor, the goal is to minimise this 50% risk ratio, which we call risk management. This reminds us of a saying from the famous book, ‘The Disciplined Trader’, which goes, ‘Success is 80% money management and 20% strategy’.
So, effectively managing both money (capital) and risk is the key to achieving financial success. To manage risk, you need first to understand the different types of risks that exist.
