Risk
In trading, risk is the possibility of losing money — and, more precisely, how much you could lose and how likely that outcome is.
Risk is the chance of losing money, and how much you could lose. Every trade and investment carries some. Higher possible returns usually come with higher risk. Risk can't be removed, but it can be measured and limited with tools such as position sizing, stop losses and diversification.
- Category
- Risk Management
- Reading time
- 3 min
- Also called
- Investment risk, Trading risk
- Updated
Risk in plain words
Risk is any uncertainty about your investments that could hurt your finances.1
In finance, risk means the uncertainty — and the possible loss — that comes with an investment decision.2
All investments involve some degree of risk.2
How to think about risk
Accept it exists
Accept that stocks, bonds and funds can lose some or even all of their value when markets turn.1
Name the type
Identify market risk: prices rising or falling with market conditions.1
Remember quiet risks
Don't forget inflation risk — even insured savings like bank CDs face it.1
Link risk and return
Expect higher potential returns to come with higher risk.2
Measure it
Decide how much you could lose on each trade and in total.
Limit it
Use sizing, stops and diversification to keep losses within your plan.
Worked examples
Example 1 — Price risk
−120A hypothetical trader buys 20 shares at 40 and the price falls to 34.
| Loss | 20 × (34 − 40) = −120 |
Market conditions moved against the position — that's market risk at work.1
Example 2 — Limited by a stop
−40The same hypothetical trader had a stop at 38.
| Loss | 20 × (38 − 40) = −40 |
The stop turned an open-ended risk into a planned, limited loss.1
Example 3 — Inflation risk
−2% realA hypothetical saving earns 2% while prices rise 4%.
| Real return | 2% − 4% = −2% |
Even insured savings come with inflation risk.1
Risk vs reward
| Aspect | Risk | Reward |
|---|---|---|
| Meaning | Chance and size of loss | Chance and size of gain |
| Rises with | Leverage and volatility | Usually also risk |
| Managed by | Sizing, stops, diversification | Good setups and patience |
| Measured by | Loss amount, drawdown | Return |
Where risk thinking matters
Sizing
Choosing Position Sizing.
Stops
Placing a Stop Loss.
Portfolios
Using Diversification.
Leverage
Respecting Leverage.
Advantages and disadvantages
Advantages
- Thinking in risk first protects capital.
- Makes losses planned rather than surprises.
- Helps compare opportunities fairly.
Disadvantages
- Risk can't be fully removed.
- Some risks are hard to measure.
- Past data can understate future risk.
- Rare events can exceed estimates.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Thinking only of gains
Ask what you could lose first.
Risking too much on one idea
Spread it out.
Ignoring leverage
Leverage multiplies losses.
Forgetting inflation
Cash has risk too.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Risk is the chance and size of a loss.
- All investments carry some risk.
- Higher return usually means higher risk.
- There are many types of risk.
- Risk can be limited, not removed.
Frequently asked questions
Can I trade without risk?
Is low risk always better?
How do beginners start?
Further learning
- Risk per Trade
Limiting each trade.
- Diversification
Spreading risk.
- Volatility
How much prices move.
- Drawdown
Measuring falls.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Risk (opens in a new tab) Checked .
- Investor.gov (SEC). What is Risk? (opens in a new tab) Checked .
Read more elsewhere
- Trading Metrics (our sister site): Risk Management (opens in a new tab)
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.