Limited Risk

DEFINITION of 'Limited Risk'

The risk of an investment that has a predetermined maximum downside potential, which is usually the initial amount invested. Limited risk exposes investors to situations where they are aware, prior to entering the position, of the maximum level of loss they may suffer. Compare this to unlimited risk, such as selling naked shorts on a stock, where the potential for loss is infinite.

BREAKING DOWN 'Limited Risk'

When choosing a limited-risk investment, the investor is fully aware of the potential amount he or she could lose. For example, entering into a cash long position in a stock has limited risk because the investor can lose no more than the initial amount invested. Similarly, purchasing option contracts long has a limited risk, as only the initial premium paid for the option can be lost.

RELATED TERMS
  1. Downside Risk

    An estimation of a security's potential to suffer a decline in ...
  2. Unlimited Risk

    The risk of an investment that has unlimited downside potential. ...
  3. At Risk Rules

    Tax laws limiting the amount of losses an investor (usually a ...
  4. Outright Futures Position

    A long or short trade on an underlying futures contract that ...
  5. Daily Trading Limit

    The maximum gain or loss on a derivative contract, such as options ...
  6. Naked Position

    A securities position that is not hedged from market risk. Both ...
Related Articles
  1. Trading

    Reducing Risk With Options

    If you want to use leverage to your advantage, you must know how many contracts to buy.
  2. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  3. Trading

    Trade The Covered Call - Without The Stock

    The standard covered call can be used to hedge positions or generate income. This calendar spread may do so more effectively.
  4. Managing Wealth

    Risk Management Framework (RMF): An Overview

    A company must identify the type of risks it is taking, as well as measure, report on, and set systems in place to manage and limit, those risks.
  5. ETFs & Mutual Funds

    3 Reasons to Use ETF Options Over Futures (SPY, QQQ)

    Learn about exchange-traded fund (ETF) options and index futures, and why it might be a better decision to use ETF options instead of futures.
  6. Managing Wealth

    Offset Risk With Options, Futures And Hedge Funds

    Though all portfolios contain some risk, there are ways to lower it. Find out how.
  7. Managing Wealth

    Calculating Risk And Reward

    Simply put, investing requires a degree of risk, and the bigger that risk, the higher the gain should be.
  8. Trading

    Solving Mixed Options Problems On The Series 7

    Learn to ace the questions that involve both options contracts and stock positions.
  9. Markets

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  10. Insights

    5 Ways New Investors Can Reduce Stress

    Learn five ways to reduce stress prior to investing, involving budgeting, diversification and risk tolerance.
RELATED FAQS
  1. When short selling, how long should you hold on to a short?

    Explore the reasons for short selling and the various factors that influence how long an investor may wish to maintain a ... Read Answer >>
  2. Why are call and put options considered risky?

    Learn why put and call options are considered risky and see how, depending on which side of the contract you are on, you ... Read Answer >>
  3. What is the maximum I can lose if I make a covered call?

    Learn what a covered call strategy is, how the strategy is created, and how to calculate the limited maximum loss on a covered ... Read Answer >>
  4. Is going long considered to be less risky than going short?

    Learn what the difference between going long and going short, why it is riskier to be short than long, and the risk associated ... Read Answer >>
  5. My brokerage firm won't allow naked option positions. What does this mean?

    A naked position refers to a situation in which a trader sells an option contract without holding a position in the underlying ... Read Answer >>
  6. What are the rules for placing stop and limit orders in forex?

    The high amounts of leverage commonly found in the forex market can offer investors the potential to make big gains, but ... Read Answer >>
Hot Definitions
  1. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  2. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  3. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  4. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  5. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  6. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
Trading Center