Risk Management in Stock Market

Stock market provides the same chance for investors to take their return , but so many investors could not earn enough returns and lose money , Why ? Because they do not know what is risk management and do not use it .

There are different ways and definition about risk management . Some people call it position sizing , while others call money management . Most of the books presented risk management so complicatedly that common investors unable to understand formulas for calculating the risk . But in this user-friendly handbook, we describe it simple and practical as possible .
Risk management is the process of measuring , or assessing risk and then developing the strategies to manage the risk , while attempting to maximize the returns . Typically involves utilizing a variety of trading techniques , model and financial analysis . The potential return from any investment is generally depending to the amount of the risk the investor is willing to assume .
Investors will not take on greater risks without the possibility of higher earnings . This is called the risk premium . In general , the greater the risk , the higher the potential return ; the lower the risk , the lower the expected return .
Different markets have varies risks . Their volatility varies for example risk in the stock market , and currency market is not the same . Also, each stock in the stock market has its own risk , because the volatility is varies. So, if a stock has more volatility you should invest less money in it . Risk management is a must for stock trading of any kind


Common Types Of Risk :

There are several main types of risk , and investors should understand them well because some affect certain investments more than others . The two common type of risks that apply to almost all investments are :

Market Risk : The chance that financial markets in general may rise or fall in value .

Inflation Risk : May be the most important factor for long – term investors to consider , because inflation is cumulative , and it compounds just as interest does .You can’t control the inflation risk , but with a good strategy you can manage and control the affect of market risk on your stocks.

A professional trader always tries to understand and control protfolio risk . Before entering into any trade , good traders first think about how much risk to take and how much risk exposure comes with a particular trade selection . Only then do they allow themselves to think about how much profit they stand to make .
Prudent investors always close their position and exposure if they determine that a protfolio caries too much risk .


Risk Management For a Trade :


Before you decide to trade consider to these fundamental principles .

 Before you trade a stock , know how much you are willing to lose .
 Check the stock to be sufficiently liquid , could you buy or sell promptly ?
 Determine the cut-loss level before trading .
 Determine your profit target ( take-profit-level ).
 Buy the stock only at an acceptable price level . Use a limit order when you buy a stock .
 Immediately after the trade has been confirmed , enter the stop-loss-at-market order at your predetermined stop-loss level .
 Take profit when the trade reaches your profit targets .

Protfolio Risk Management :

Your protfolio risk will be well under control and you manage your protfolio risk actively , by managing the risk of each trade . Follow the pointers to control your protfolio risk management

 Determine your overall cut-loss level . Usually your protfolio should not lose more than 10 percent of your capital .
 Diversity your investment in at least six or more different stocks .
 Know your overall risk tolerance before building up the protfolio.
 Act quickly when you see your risk limits exceeded .
 Close out the entire protfolio if it losses to your overall stop-loss level.