What is risk management?

What is Risk Management?

Risk management is the process of identifying investment risk and taking steps to mitigate it. Learn about risk management, the different types of uncertainty in derivative markets and how investors view it to manage the risks.

NSCCL ensures that the obligations of traders are proportionate to their net wealth in securities trading. To prevent market failures, it has established a robust risk management system that is continuously monitored and updated. It tracks the performance and net worth of members, monitors their positions in the market and collects margins from them. Members are automatically disabled if they exceed the limits.

There are many types of risks that participants in derivative markets face:

Credit Risk: Credit risk due to default by a counter party. This is almost negligible because the NCCL takes care of the settlement.

Market Risk It is the possibility of losing your investment due to adverse price movements.

Liquidity risk: If the market is inliquid, it is possible for transactions to be unwinded.

Operational risk: It is the possibility that some operational difficulties like a power failure could cause a problem.

Trading Philosophy - An Investor's Perspective:

Investors must be able to manage risk in stock trading and securities. The first step in managing risk is to identify the risk and take corrective steps to reduce it. It is possible to control the impact of the risk on your investment portfolio if it cannot be avoided.

Trend Friend: The prevailing stock market trend accounts for approximately 60% of stock price movements. Stocks move with the market. It is important to stay on the right side for the trends.

Diversified Portfolios/Holdings Although stocks held by a single company may offer higher returns, they also come with greater risk if the company goes under. Diversifying your holdings is a great way to reduce the risk of holding stocks.

Following Stop Loss Discipline Stop loss discipline is the principle that each position, buy or sell should be backed up by stop loss. It must be placed below buying price and higher than selling price. These should be used to close the positions if the price moves against them, thus minimizing the loss. A naked position is a risky one.

Covered call Option: This is a great way to create some downside protection and increase the potential return on portfolios.

Protective put options: This provides security in the event that long positions drop in price.