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.

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