What is Risk Management?
The practice of identifying, measuring, and controlling investment losses.
Formal Definition
Risk management is the discipline of limiting the probability and magnitude of losses through tools such as position sizing, stop-loss orders, diversification, and exposure limits, guided by metrics like Value at Risk and maximum drawdown. Its goal is not to eliminate risk but to keep it sized so that no single loss is fatal to the portfolio.
In Simple Terms
It is the set of rules that keep one bad trade from wiping you out, like not betting too much on any single stock and having an exit plan before you buy. Survival first, profits second.
Example
Capping any single stock at 5% of the portfolio and setting a stop-loss on each position are core risk management practices.