WHAT IS 'Unlimited Risk'

Unlimited risk refers to the risk of an investment that has unlimited downside potential.

BREAKING DOWN 'Unlimited Risk'

Unlimited Risk is the opposite of limited risk. In unlimited risk there is a potential to lose more than your initial investment, which is possible in short selling or in trading futures contracts. Risk itself refers to the probability that an investment will have an actual return different from the return that the investor expected. Risk ranges from losing some of one’s investment to potentially losing the entirety of the original investment.

Risk varies from investment to investment, and one form of assessing risk can be calculated by using the standard deviation of the historical returns or average returns of a specific investment, with a higher standard deviation indicating a higher degree of risk. Though the process may be intimidating, investors make high-risk investments regularly and for various logical reasons. The main justification is that, in finance, the greater the risk to an investor the greater the potential return. The higher potential return compensates for the additional risk taken on by the investor.

Examples of Unlimited Risk Investments

The most common examples of investments with unlimited risk are short positions and futures contract trading. A futures contract is a kind of financial contract that obligates a buyer or a seller to sell an asset at a future predetermined date and time. Traders use futures to speculate on price movements of underlying assets, and most commonly appear in the commodity market.

The holder of a futures contract must fulfill the terms of his contract, but in actuality the underlying goods in futures contracts are rarely physically delivered. Investors can hedge or speculate on the underlying contracts without actually holding the contract until expiry and delivery of the goods. In order to benefit from futures, investors use the movements in the prices of the underlying assets to anticipate an increase or decrease in the price of that underlying asset in the future.

Short positions are another type of investment with unlimited risk. Essentially, a short position involves selling first and then buying later, with the expectation that the asset’s price will drop. In a successful short position, the price at which the investor sells the asset is higher than the price at which they buy the asset later. Investors commonly take short positions on the Forex market, where private banks, commercial companies, central banks, investment management firms, hedge funds, retail Forex brokers and investors can buy, sell, exchange and speculate on currencies.

  1. Price Risk

    Price risk is the risk of a decline in the value of a security ...
  2. Basis Risk

    Basis risk is the risk that offsetting investments in a hedging ...
  3. Futures Contract

    An agreement to buy or sell the underlying commodity or asset ...
  4. Risk

    Risk takes on many forms but is broadly categorized as the chance ...
  5. Contract Unit

    A Contract Unit is the actual amount of the underlying asset ...
  6. Index Futures

    Index futures are contracts based on a financial index, which ...
Related Articles
  1. Personal Finance

    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.
  2. Investing

    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.
  3. Trading

    Advantages Of Trading Futures Over Stocks (APPL)

    We look at the top eight advantages of trading futures over stocks.
  4. Investing

    AT&T Joins Unltd. Data War; Sprint Ups Offerings

    AT&T takes a page from Verizon, announcing it too will offer an unlimited data plans.
  5. Insights

    How to Invest In Developing Markets

    Developing markets can be attractive additions to many investor's portfolios, but carry additional risks that must be considered.
  6. Trading

    The Difference Between Forwards and Futures

    Both forward and futures contracts allow investors to buy or sell an asset at a specific time and price.
  7. 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.
  1. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. Learn how futures contracts can be used to limit ... Read Answer >>
  2. Why do companies enter into futures contracts?

    Learn how companies use futures contracts to hedge their exposure to price fluctuations as well as for speculation. Read Answer >>
  3. What are the major categories of financial risk for a company?

    Examine four major categories of financial risk for a business that represent potential problems that a company may have ... Read Answer >>
  4. Why are mutual funds subject to market risk?

    Find out why mutual funds, like all investments, are subject to market risk, including how the different types of market ... Read Answer >>
  5. What is the difference between hedging and speculation?

    Hedging and speculation are very different in purpose, function and risk profile. Find out how and why investors use both. Read Answer >>
  6. Financial Risk vs Business Risk

    Understand the key differences between a company's financial risk and its business risk – along with some of the factors ... Read Answer >>
Trading Center