Risk4 min read
Top 5 Risk Management Rules Every Trader Must Follow
Risk management is the foundation of successful trading. These five rules keep you in the game.
Risk management
Hedgingnuksan se bachne ke liye ulta sauda
Taking a second position that offsets the risk of an existing one, such as buying a put option to protect a portfolio of shares against a fall.
Hedging means opening a position whose gains would offset losses in something you already hold. It is insurance, and like insurance it costs money. The most common retail hedge in India is buying a put option against a stock or index holding. Suppose you own 750 shares of SBI at ₹800, worth ₹6,00,000, and you fear a fall over the next month. Buying one lot of the ₹780 put for a ₹12 premium costs ₹9,000. If SBI drops to ₹720, the shares lose ₹60,000 but the put gains about ₹36,000, cutting the damage. If SBI rises, the ₹9,000 is spent and the shares gain. A hedge reduces both loss and profit; a position that is fully hedged makes nothing. Businesses hedge currency exposure with USD/INR futures for the same reason. Hedging is a risk tool, not a way to avoid learning risk management.
Related terms
Lessons that use this term
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What is margin in the share market? Intraday, delivery and F&O margins explained
Margin is the money your broker blocks before it lets you trade. How much depends on whether you buy for delivery, trade intraday or take a futures or options position.
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Leverage and spread, in plain language
Leverage makes a position bigger than your cash. The spread is the gap between the buy and sell price. One multiplies your results, the other quietly charges you on every trade.