Risk Management
The practice of identifying, measuring and limiting the losses a portfolio can suffer.
How it is identified
Test: a maximum acceptable loss is defined in advance, and position sizes are set so that it cannot be exceeded in normal conditions
Unit
qualitative
In depth
Risk management is about survival rather than returns: its purpose is to ensure that no single outcome ends the ability to keep investing, because compounding requires continuity. Its most powerful lever is position size, which is chosen before the trade and cannot be revoked by a gap, unlike a stop-loss, which can be jumped. The mathematics is unforgiving in one direction — a 50% loss requires a 100% gain to recover — which is why avoiding large losses matters more than capturing large gains. Good risk management usually reduces returns in good years, which is the cost of not being destroyed in bad ones.
Worked example
A 20% loss needs a 25% gain to recover; a 50% loss needs 100%; an 80% loss needs 400%. The asymmetry is why limiting the size of a loss is worth more than adding to the size of a gain.
Illustrative figures, chosen so the arithmetic is easy to follow. Not a live price and not a valuation of any company.
Educational reference only
This entry explains what “Risk Management” means. It is not investment advice and not a recommendation to buy or sell any security. Any numbers above are illustrative, not live prices, and nothing here predicts price direction or rates a stock. Consider your own circumstances and consult a SEBI-registered investment adviser before acting.