Risk is known as the possibility of something bad happening. Risk involves uncertainty about the effects of activity concerning something that humans value. Such as wealth, well-being, family, property, or the environment. It is human nature to focus on the negative and undesirable consequences. When it comes to day trading, the risk is the chance that a stock will lose value. An investor’s personality, lifestyle, and age are some of the top factors to consider for individual investment management and risk purposes.
Each investor has a unique risk profile that determines their willingness and ability to withstand risk. In general, as investment risk rise, investors expect higher returns to compensate for taking those risks. A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk an investor is willing to take; the greater the potential return. Risks can come in various ways and investors need to be compensated for taking on additional risk.
Fundamentals of Risk
Individuals, financial advisors, and companies can all develop risk management strategies. They do this in an attempt to reduce risks associated with their investments and business activities. Academically, there are several theories, metrics, and strategies that have been identified to measure, analyze, and manage risks. Some of these include standard deviation, beta, Value at Risk (VaR), and the Capital Asset Pricing Model (CAPM).
Measuring and quantifying risk often allows investors, traders, and business managers to hedge some risks away by using various strategies including diversification and derivative positions. Every saving and investment action involves different risks and returns. In general, financial theory classifies investment risks affecting asset values into two categories: systematic risk and unsystematic risk. Generally speaking, investors are exposed to both systematic and unsystematic risks.
No investment is fully free of all probable risks, certain securities have so little applied risk that they are seen as risk-free or riskless. Riskless securities often form a starting point for analyzing and measuring risk. These types of investments offer an expected rate of return with very little or no risk. Often, all types of investors will look to these securities to preserve emergency savings or money that needs to be immediately available. Examples of riskless investments and securities are certificated deposits (CDs), government money market accounts, and U.S. Treasury bills.
Systematic risks are also known as market risks, which can affect the entire market. Market risk is the risk of losing investments due to factors such as political risk and macroeconomic risk. Political risk and macroeconomic risk affect the performance of the overall market. Market risk cannot be easily controlled through portfolio diversification. Other common types of systematic risk can include interest rate, inflation, currency, liquidity, country, and sociopolitical risks.
Unsystematic risk is also known as a specific risk or idiosyncratic risk. Unsystematic risk is a category of risk that only affects an industry or a particular company. Unsystematic risk is the risk of losing an investment due to a company or industry-specific hazard. Examples of unsystematic risk include a change in management, a product recall, or a regulatory change that could drive down company sales. It can also be a new competitor in the marketplace with the potential to take away market share from a company. Investors often use diversification to manage unsystematic risk by investing in a variety of assets.
Financial exposure is the amount an investor stands to lose in investment should the investment fail. Risk is knowing and understanding financial exposure. This is a crucial part of the investment process. Investors are always looking to limit their financial exposure, which helps maximize their profits. Financial exposure applies not only to investing in the stock market, but exists whenever an individual stands to lose any of the principal value spent. When an investor diversifies their portfolio effectively among many asset classes, it lessens overall volatility. If the market heads downward, then non-correlating asset classes will minimize the downside.
Time horizon and liquidity of investments is often the main factor influencing risk assessment and risk management. If an investor needs funds to be immediately accessible, won’t invest in a high-risk investment. This is because the investment would not be able to be immediately liquidated. This is why an investor would place their money in riskless securities. Time horizons are also an important factor for individual investment portfolios. Younger investors with longer time horizons to retirement may be willing to invest in higher-risk investments with higher potential returns. Older investors would have a different risk tolerance since they will need funds to be more readily available.
The risk-return tradeoff is the balance between the desire for the lowest possible risk and the highest possible returns. Low levels of risk are connected with low possible returns, and high levels of risk are linked with high potential returns. Each investor must decide how much risk they’re willing and able to accept for a looked-for return. This will be based on factors such as age, income, investment goals, liquidity needs, time horizon, and personality. It’s important to keep in mind that higher risk doesn’t automatically mean higher returns.
The risk-return tradeoff only shows that higher-risk investments have the possibility of higher returns; however, there are no guarantees. On the lower-risk side of the field is the risk-free rate of return. This is the theoretical rate of return of an investment with zero risk. It represents the interest you would expect from a risk-free investment over a specific period. The risk-free rate of return is the minimum return you would expect for any investment because you wouldn’t accept extra risk unless the potential rate of return is larger than the risk-free rate.
Finding the right balance between risk and return helps investors and business managers achieve their financial goals. They make investments that they can be most comfortable with. That is exactly what you need to do when you invest in day trading find a number you are comfortable trading with in case you lost it wouldn’t break you. You also need to keep the contract size small until you get a feel of the market. I can teach you how to day trade like the top 10% without a complicated strategy or any technical indicators, even if you are a beginner.
My goal has always been to teach as many day traders to achieve their personal financial goals, whether they are novice traders or experienced traders. The MK VIP training has plenty of resources to help you get started on reaching your day trading goals. I teach the working class how to earn $10,000 a month through day trading. I help my students avoid the challenges I faced when I first became a day trader; especially when it comes to dealing with risks. As of now, MK Financial LLC is already the #1-day trading coaching business in the US in just one year. You are just a click away from learning what you need to become a day trader with any amount of capital and take your life and salary to the next level.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
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