Limited Risk

AAA

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.

INVESTOPEDIA EXPLAINS '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. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. Risk Capital

    Investment funds allocated to speculative activity. Risk capital ...
  4. Risk-Return Tradeoff

    The principle that potential return rises with an increase in ...
  5. Eat Well, Sleep Well

    An adage that, referring to the risk/return trade-off, says that ...
  6. Beta

    A measure of the volatility, or systematic risk, of a security ...
Related Articles
  1. Beta: Gauging Price Fluctuations
    Investing Basics

    Beta: Gauging Price Fluctuations

  2. Options Risk Graphs: Visualizing Profit ...
    Options & Futures

    Options Risk Graphs: Visualizing Profit ...

  3. Should Your Options Go Naked?
    Options & Futures

    Should Your Options Go Naked?

  4. Another Sound Lesson In Risk Management
    Investing News

    Another Sound Lesson In Risk Management

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center