The other day, an investor friend of mine was telling me about risk management. He said that many people lose lots of money because they don’t employ risk management. I understood him because I have lost my own money and at the time I didn’t really understand why! Therefore, in upcoming articles I would like to examine risk and how we can manage risk to protect our investments.
First of all what is risk? Whenever we invest we are taking a risk that we will not get our money (the principle) back or that we will only get part of our money back. Why do we take these risks? Because we hope to get our money back and make more money in addition.
There is a general idea called the risk-reward concept. This concept says that people will only take on more risk if they believe that they can receive more reward in return. One of the questions that each person should ask himself is how much risk he wants to accept. This differs from person to person. When people invest there is always the risk of losing the money invested. In return for taking this risk one expects a financial return. Ideally the greater the risk, the greater the return should be for holding this investment. Conversely, the lower the risk the lower, the less reward one expects.
In the next article we will look at how to determine ones risk capability.
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