The first step in the risk management process is to acknowledge the reality of risk, as said by the famous Charles Tremper. Financial risk management is how you play the game of investment where even half of your investment is potentially quantified for profits or loses.
Before we further go into the concept, let us first understand what is risk management.
Risk management refers to the process of identification, analysis and acceptance of uncertainty in the investment. An investor must weigh the options for an investment to be potentially capable of taking the risks and appropriate actions to be taken in case of any moral hazard.
If we further look into the matter of eliminating any risks associated with investment, we can see that it comes out that there are 2 types of risk –
- Business Risk
Such risks are those where investment is made in an individual company and any happenings made in that company will result in risk for the investor for which investment has been made. This will be troublesome for the investor to think through before making an investment.
- Industry Risk
Here the risk of the investment lies in a particular industry. It is the kind of risk where the investor must save itself from making an undecided investment. It can result due to any event happening in that particular sector.
It can be said that risk management is essential not optional because the amount you lose during the tough times determines how much you must make during the good times to meet your financial goals.
Thus, if one wants to achieve higher return, then it must take more risks. But with increased risk comes increased volatility in the market. But how much the investor is risking will determine the weight of volatility the investor is willing to take for it to achieve its financial goal.
If taken into consideration financial risk management can control the investment game. It preserves the capital when the opponent is giving away at you so that when the time is right you strike to get profits from the recovered losses.
In other words, it can be said that risk management in investment is safe, consistent profits in the market. By managing the possibility of any risks can get you further with achieving your financial security with the detailed analysis of the market conditions.