Risk is part of everybody’s lives. As a society, taking risks at times is necessary to mature and develop.
In this fast-moving and ever-changing world that we live in, the risk that we have to face changes instantly. Therefore, we have to make sure to manage risks to lessen threats and maximize potential.
Defining Risk Management
In the world of investing, risk management is the practice of recognizing possible risks beforehand. Since the outcomes of corporate activities are uncertain, they are believed to hold some element of risk.
Risk management happens anytime and anywhere in the financial industry. It occurs whenever an investor or fund manager analyzes and tries to gauge the probability for losses in an investment and then carries out the action suitable for his/her investment, goals and risk tolerance.
Losses may result from:
- Financial risks
- Operational risks
- Perimeter risks
- Strategic risks
Risk can be managed by:
Buying Insurance
Buying insurance is making a personal decision about how an individual would like to manage risk in times of difficulty.
You need to have a good understanding of the risks that you are about to face, the value and fine points of what you want to insure, as well as how much excess you will agree to.
Hedging
A hedge is an investment meant to protect an asset or portfolio against loss. Hedges usually take the opposite direction in a related security, like futures contract.
Hedging is also similar to buying an insurance policy. It is a protection from sudden risky events, but is unlikely to be used right away. In the event a stock or portfolio suffers from an unexpected cause, having an option from an offsetting position will help lower losses.
Risk Sharing
Risk sharing is simply allocating risks among-st groups, departments, teams, or individuals. Premiums and losses of each member within the organization are distributed on a predetermined method.
By cutting the stake and investing with others in an array of risky investments, the risk of each investment is then reduced.
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