There is a risk even in ?safe? investments such as bank deposits, because the earnings from interest may not be able to beat the rate of inflation. In financial matters risk can be translated as a state of uncertainty. It is a kind of deviation from the standard norms.

It is said that the more risk you take, the more income you can make. The deeper you dive into the ocean, the more valuable gems you can find. The opportunity to make profits from your investment is associated with the possibility of suffering losses as well. While this argument is true to a great extent, taking risk should not become a game of gambling.

You cannot work in a state of fear and uncertainty. Protecting yourself against excessive losses in stock trading is called risk management.

The risk in stock trading stems primarily from the unpredictability or the volatility of the stock market. You do not know when the price of your stock will suddenly fall. You have to live and work with the anxiety and fear of the unknown.

A shrewd stock trader takes risks and uses protective measures to reduce the possibility of losses. You should not dive into the ocean without protective life saving equipment.

Risk management, first involves understanding the risks and then devising measure to secure against them. You need to properly evaluate the market risks and the level of uncertainty surrounding them. Once you understand the nature of the risk and the level of your tolerance, the element of fear associated with risk is substantially reduced.

Here are some examples of risks that are an inevitable accompaniment of stock trading.

The sudden ?crash? in stock market price is often cited as an example of risk. The implications of crash, however, differ from investor to investor.

Suppose you bought a stock at $ 100 per share. Its value increased to $200 in 15 months. Suddenly there was a correction in stock prices. The price of your stock fell to, say, $50 per share. This was a crash for you.

On the other hand if the price of your stock rose substantially above your buy price and fell down a little, it would not be a crash for you.

In another example, the price of your stock has risen substantially over your buy price. Then there is news in the media about a strong and imminent correction. There is a kind of stampede among the shareholders in selling off their stock. Obviously the prices of the shares will fall. The next day, the correction does happen, but it comes as a far cry from being a potential collapse. It was like a straw that hit the camel's back.

How should you manage your risk in stock trading?

1. The first and most important step in managing your risk in stock trading is to diversify your portfolio. Do not put all your eggs in one basket. If you lose in one stock, you gain from the other. The loss will be nullified to some extent.

Diversification means that not only should you invest in a variety of stocks, but you should also invest in different types of investment plans. For example, you may invest in ETFs, dividend reinvestment plans?DRIPs?scheduled investment plans, retirement plans, and education plans and so on.

2. Price fluctuations are a characteristic feature of stock trading. You must take a long-term horizon in investment. It has been found that despite ups and downs in stock prices that occur almost on daily basis, the value of good quality stock rises over a period of time. Patience and forbearance are matchless virtues in stock trading. Don't let you heart beat fast or slow with every rise or fall in price of your stock.

3. If you are a short-term investor, you must learn to fix an achievable target on the profit margin on your investment. You may, for example, fix a return of 10% to 20% on your investment. As soon as the price of your stock rises to this level, you must sell off your stock even if its price appears to be shooting through the roof. Do not be taken in by the greed to let your investment double or treble before you decide to sell it. The price of the stock may crash down any moment dashing your dreams to dust.