Risk and stock portfolio management are two entities that always go hand in hand. In buying and selling securities, investors always prefer favorable returns, but loss is often inevitable. Risk is essentially the chance of loss, which in stock market terms means the chances that returns will be less than favorable. Successful risk management, even for beginners, requires investors to utilize their trading tools to their advantages.
Definition of Risk, and How it Affects Stock Trading
Risk, as Investopedia describes it, is the chance that actual return will be different from the expected return. When directly applied to the market, investors expect gain in executing certain trades (or else they would not trade in such fashions), and risk is the chance that they will be wrong, and they will lose money on some or all of the investments.
For instance, if an investor buys 10 shares of stock X, presently trading at $17 per share, he has spent $170. Without placing any type of sell order to kick in at a certain point, virtually all of that investment is risk; if X should plummet, the $170 spent could turn into nothing. If he placed an order to sell at $8.50 per share, 50% of the investment could be lost. Managing risk is an important part of managing any portfolio, and that is why it is worthwhile to limit it insofar as possible.
