Home Business Insights & Advice Risk management on the financial market

Risk management on the financial market

by John Saunders
1st Dec 20 10:53 am

The financial market is the global trading place. Within seconds, transactions are made and closed. Meanwhile, there are even automated systems and algorithms that take over secure trading. Secure is the keyword here. After all, there is no investment that is completely secure. Even the algorithms described as secure, which buy in a thousandth of a second and immediately sell at a profit if an opportunity arises. The problem is that the systems can no longer be monitored. They have become a kind of self-runner, where nobody knows anymore which transaction came when, how and from which system and nobody can pull the “plug” anymore. Fortunately, the system is still running and there is no indication that the shot will backfire. But to come back to the topic of risk, there are various systems, calculations and procedures to determine the opportunities and risks in the market.

Learning to assess the risk

The risk assessment applies to all types of investment. The reason is simple, that risk is always present and almost every purchase or investment is a type of investment. For example, the purchase of a vehicle is an investment or the purchase of a computer. The purchase opens new possibilities and ways. Here the motto “everything goes, nothing must” applies. Because of course there are also purchases which are not aimed at fulfilling a certain goal. For example, the purchase of a computer can only be done to spend your free time with video games. On the other hand, this investment can be aimed at learning new things with the computer and thus generating new financial resources. If this is the goal, the value of the investment is added together with the total time that was needed to make the money for the purchase, to make the purchase and to deal with the technology and software. In short, all funds spent on an investment are added up. Thus, it is already possible to see whether the risk, the value of the investment is too high or whether it is too much to bear. Sites such as bestbrokerreviews.com help to evaluate investments.

The further evaluation of the risk

As already explained, there is a risk in every life situation, project and purchased product. This refers not only to products that can be operated and used, but also to investments on the financial market. The “formula” for calculating the risk is always the same, several factors are added, if at all. However, the basic building block remains the same. The risk is the product of the probability of the damaging event times the extent of the damage. To this theoretical formula, however, other practical factors of influence are added, such as the sum of the investment and the own financial situation. Assuming one would buy a share with the last money, the risk is to be evaluated higher, than if the purchase is made with money, which would lie normally only on the savings account. In addition, the risk assessment also takes into account for what purpose, with what goal and with what prospect of profit the investment is made.

The definition of risk

While trying to calculate the risk, the first difficulties arise. This means the evaluation of the individual factors. First and foremost, the probability that the damage will actually occur. To determine the value, a comprehensive analysis of all factors influencing the investment is needed. The differentiation of right and wrong, good or bad, bad buy or investment for the future is not enough. Also the evaluation of the damage is not always as simple as it sounds in the theoretical formula. The damage does not only refer to the sum spent on the investment, but also to the time spent and the opportunity costs. The opportunity costs are lost revenues, which have arisen from the fact that the existing possibilities can no longer be used. We also speak of costs of regret or costs of lost profits. In terms of risk assessment this is to be evaluated as follows. The sum spent on one investment can no longer be used for other investments. Thus the extent of the loss is to be evaluated much more extensive.

What should be considered in risk management?

It is not a new way of thinking that one should make provisions for the future. According to this, from a certain age everything is done to look for a safe investment. This can be the purchase of your own real estate or an investment on the financial market. The Internet has made access to the financial market much easier. Now anyone with an Internet connection and a device can create a user account with an online broker and make numerous investments. There are commodities, funds, indices, foreign exchange and stocks, to name just a few. It is then up to you to make the investment as well as the risk analysis. But the big advantage is that you have access to different analysis tools. These analyze and evaluate the price of a financial product. As a trader you have to be able to interpret the result correctly. This requires, on the one hand, sufficient experience and extensive knowledge of the market. Risk management takes place in the interaction of the evaluation of all influencing factors, their strength and the knowledge and experience with the result of the risk assessment. The more people are involved, the more comprehensive the management becomes. Companies have to consider product life cycles, changes in buying behavior, increasing competition, new players in the market, new ideas and technologies as well as all levels of employees in the analysis. As an independent trader as a financial market, the factors influencing risk are no less risky, but not as extensive.

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