What is risk management and how to manage risk in the stock market?


Risk management is a way to reduce the risk. Risk management refers to act to reduce the risk. We must consider that investment not only gives return but also risk. Return and risk are two side of a coin that cannot separate each other.

The types of risks are interest rate risk, market risk, currency risk, default risk, country (sovereign) risk, etc. Interest rate down might turn your CDs rate and return. Today Fed rate just 2% and there is possibility the Fed turn down Fed rate.

The market risk might loss your money at stock investment. We cannot predict stock price tomorrow because the stock move irregular. Stock price change might loss your money.

Risk management. Image by ismdelhi.in

Default risk might loss your bond. Some issuer sometimes cannot pay their debt to investor because they suffer loss.

If we put money at overseas, we must side with currency risk. Rising foreign currency may loss your investment value.

We realize that risk is dangerous. They might loss your money. Build best portfolio is one solution to manage risk. As an investor, you should invest at variety investment. Buy stock, bond, index at certain proportion. If you risk avoider, you can invest majority at bond. Meanwhile, as a risk lover, you can put majority money at stock. Anyone who is moderate investor can invest both stock and bond equal.

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Every person has freedom to determine their portfolio because he/she invest his/her money. Image by edelweiss.in

Do not put your money at same characteristics investment, E.g., You buy all company dotcom stock. This is not portfolio but a union. When dotcom booming, you get profit over many times. Conversely, you are going to suffer financial loss over many times when dotcom bearish.

Every person has freedom to determine their portfolio because he/she invest his/her money. He/she will bear all the risk. Writer just can suggest investor to build portfolio.

We can say that portfolio is good when each of investment has negative correlation. Each investment will cover each other. Today, Oil stock has rise over many times, meanwhile property stock has turn down. If you hold both stock (i.e., oil and property stock), you will get profit. Imagine you just hold property stock; you can suffer financial loss over many times.

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