Risk management

Trying to control the outcome of a known or predictable range of gains or losses.

Risk management involves several steps, beginning with a sound understanding of one's business and the exposures or risks that have to be covered to protect the value of that business.

Then an assessment should be made of the types of variables that can affect the business and how best to protect it against unwelcome outcomes.

Risk management may be as simple as placing stop loss orders to prevent large losses, or as complex as hedging positions with Options or diversifying the portfolio to ensure that you are not overexposed to a single industry or instrument type.

Consideration must also be given to the preferred risk profile, that is, whether one is risk-averse or fairly aggressive in approach. This also involves deciding which instruments to use to manage risk, and whether a natural hedge can be used.

Once undertaken, a risk-management strategy should be continually assessed for effectiveness and cost.