Risk Management

Definition

Risk management in investing is the process of identifying, analyzing, and accepting or mitigating uncertainty in investment decisions. Key risk management strategies include diversification (spreading investments across assets), position sizing (limiting the amount invested in any single position), stop-loss orders (automatically selling at predetermined loss levels), hedging (using derivatives to offset potential losses), and asset allocation (balancing risk and reward across asset classes). The general rule is to never risk more than 1-2% of your portfolio on a single trade. Effective risk management does not eliminate risk but ensures that potential losses are controlled and acceptable.