Risk Management

Risk management means the process of identifying, controlling, and reducing possible losses. In simple terms, risk management is how investors protect themselves from things going wrong. Risk management is important because markets are uncertain and losses can happen even when an idea seems reasonable. Investors use diversification, position sizing, cash reserves, stop-loss rules, or hedging to manage risk. For example, an investor may avoid putting all their money into one stock to reduce the damage if that stock falls. Risk management does not eliminate all risk. It helps control risk so that one mistake or bad event does not become too damaging.