What it is:
How it works/Example:
Let's assume part of your shares probably be worth less if the economy starts to deteriorate. How do you limit your risk?
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 it matters:
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