Price risk is the risk of investing in an asset that will be worth less than what was paid for it. Price risk management can be done by diversifying a portfolio or setting a standing order to sell stocks once their value drops below a certain level. The amount of price risk one is willing to take may depend on their investing goals and stage of life.
Price risk is the risk that an investor will invest in an asset that will ultimately be worth less than what they paid for it. There are ways to manage price risk, but as long as there is an investment in unsecured products, there is no way to eliminate it completely. Therefore, the question is often how to mitigate market price risk and what to do when it starts to become a serious problem.
The goal of any investment is to make money. However, the risk associated with the practice of investing is real and will mean that there will always be some losers. The final question is to determine how much the price risk is worth the potential rewards. This can be a little different for each investor and can even be different for the same investor, depending on what his objectives are with an investment project.
Price risk management is intended to help lessen the possible impacts of devaluation. This can be done with a standing order to a stockbroker, for example. In this case, an investor can have a stock sold by a broker once its value drops below a certain level. Often this order is given well in advance of a price drop. This helps prevent further losses, but you will not recover any loss in value up to that point. If the stock’s value begins to rise, there may be a standing order dictating when to buy back that stock.
Another price risk management strategy is to diversify a portfolio. Diversification will often involve buying shares of two industries that are somewhat opposite of each other in function. For example, if an airline stock is doing poorly, perhaps stocks that operate in some other type of public transportation area, like bus travel, are doing better. Therefore, finding a good balance could help reduce some of the price risks.
The question of how much price risk one is willing to take may be a function of where they are in their investing lives. Those who are using investments as a way to raise money for retirement and who are just starting out will probably be more inclined to take more risk. However, those closer to retirement will not be willing to bear the same amount of risk simply because there is less time to recoup it.
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