What is Risk Management?
Investing and trading in the markets does not have to come with unlimited risk. Investors and traders have full control over how safe or risky they would want their portfolio to be by assessing the risk involved with an asset as well as incorporating risk management strategies to allow for more or less risk. It is a process of analyzing the risk involved in investment and mitigating it up to the optimum level. With the help of risk management techniques, investors try to reduce the possibility of losses by taking some appropriate action. Poor risk management may result in unfavorable returns for investors as well as companies. For instance, the recession that started in 2008 was a result of poor risk management and inappropriate financial planning which has shaken financial markets across the world.
Why You Care
In simple words, risk management involves two essential steps. The first is identifying how much risk exists in particular investment and second is managing that risk to meet your investment objective. Risk management can be done by several techniques. For example, purchasing government bonds of low risk over the corporate bonds of high risk can help investor to get guaranteed returns over the period of time.