Stock Market Glossary
Risk
The possibility that an investment will underperform or incur a loss.
In brief: The possibility that an investment will underperform or incur a loss.
Meaning in practice
Risk is more than volatility: it includes price loss, default, liquidity, inflation and political risks. Anyone who doesn’t understand risks is almost always a loser in the long term – returns without an understanding of risk are a game of chance.
Context for investors and traders
For traders, this term is most useful when preparing and executing an order. Its meaning depends on the venue, liquidity, time frame and order type. A single reading is not a reliable buy or sell decision.
How to use this in practice
In practice, the term should be linked to a specific trading plan: entry, exit, position size and costs belong together. In short time frames, spread, slippage and delayed execution can quickly outweigh the theoretical benefit of an observation.
What to keep in mind
Write down which observation confirms or invalidates your assumption before trading. This keeps the term a decision-making tool rather than a retrospective justification for risk already taken.
