Risk

Management
IN STOCK INVESTING
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Introduction

Before diving into stock investing,

mastering the art of risk management is
crucial. The stock market's volatility is a
constant challenge, and this guide will
explore various strategies to effectively
manage risks.

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What is Risk
Management?

Risk management is the set of steps an

organization takes to prevent unwanted
events from happening, or at least to
reduce the damage of those events
when they do happen.

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Types of Risks
Systematic Risk: Also known as market risk
or non-diversifiable risk.
It is the risk that is inherent to the entire
market or an entire market segment.
Eg:- Natural Disasters, Economic Recession

Unsystematic Risk: Also called specific risk,

diversifiable risk.
Pertains to risks that are specific to a
particular company or industry.
Eg:- Company management issues, supply
chain problems

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Risk Management Techniques

Diversification

Diversification involves spreading

investments across different stocks to
lower unsystematic risk.
However, after a certain point, adding
more stocks may not reduce overall risk
due to systemic risk tied to the entire
market

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Hedging

Hedging is a protective strategy for stocks.

If you fear your stock's value might decline,
you can buy a put option for that stock,
essentially betting on its price drop.

If the stock falls, the put option profits,

offsetting your stock loss, allowing you to
hold onto your stocks.

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Stop Loss and Targets

Investors might limit how much they invest

in one stock and set a maximum loss they
are willing to bear using ‘stop loss’ limit.

Secondly, Investors Secure profits by setting

a target using a 'Good Till Triggered' (GTT)
order, automatically selling a stock at the
desired price to lock in gains.

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Advanced Risk Management
Techniques

Understanding Beta

Beta measures how a stock moves

concerning the entire market. High-beta
stocks are like rollercoasters, while low-
beta stocks are more stable. Investors
must consider investing based on their
risk tolerance.

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Analysing Value at Risk (VAR)

Value at Risk (VAR) is a powerful tool for

risk management. It helps you assess
potential losses.
VAR tells you the worst-case scenario for
your investments by predicting how much
you could lose within a certain
confidence level.

Eg: A stock's 5% VAR indicates a 5%

chance that losses could meet or exceed
that percentage.

Vinayak Narvekar
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