What is Limited Risk?
In finance, limited risk describes any investing strategy intended to protect an investment or portfolio against loss. Limiting risk usually involves securities that move in the opposite direction than the asset being protected.
How Does Limited Risk Work?
One way is to buy defensive stocks. These stocks might be from the food, utility, or other industries that sell products that consumers consider basic necessities. During economic slumps, these stocks tend to gain or at least hold their value. Thus, these stocks may gain when your XYZ shares lose.
Another way to hedge is to purchase a put option contract on the shares (this would essentially allow you to "lock in" a particular sale price on XYZ, so even if the stock crashed, you wouldn't suffer much). You could also sell a futures contract, promising to sell your stock at a set price at a certain point in the future. You could also limit your risk by using options.
You can measure limited risk. The term delta, for example, describes how much the price of an move for each $1 change in the price of the underlying stock. (Delta changes with every change in price, volatility, and time to ; but for small to moderate changes, delta is a good approximation of the you're likely to see in an .)
Why Does Limited Risk Matter?
Placing limited risk in a portfolio is like buying insurance. It is protection against unforeseen events. This is why gains and feels this increase might not be sustainable in the future. Like all strategies, limiting one’s risk requires a little planning. However, the security that this strategy provides could make it well worth the time and effort in a period of declining stock prices.is an important technique to learn. Although the calculations can be complex, most investors find that even a reasonable approximation deliver a satisfactory . is especially helpful when an investor has experienced an extended period of
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Looking to get a little more bang for your saved buck? Depositing your hard-earned dollars in an online bank might be worth a long look if you're seeking higher yields. Today, many of the...Read More →
Peter Lynch, in his heyday with Fidelity Magellan Fund (Nasdaq: FMAGX), took a remarkably powerful yet simple...Read More →
Imagine finally starting your dream vacation. You step out into the streets of Venice, sit down to take your first bite of real Italian pizza and ... wait. Where's your wallet? You'd better hope...Read More →
About six years ago, I bought a stock at $5 a share that I later sold for more than $30 per share. That's a 500% increase. Not bad, right? Well, it so...Read More →
If Frankenstein author Mary Shelley had been an investment fanatic, she might've liked the idea of the Business Development Company (BDC...Read More →