A price risk is the risk that an investor will invest in an equity that will eventually be worth less than what they paid for it. There are ways to manage price risk, but as long as there is some investment going on in unsecured products, there is no way to totally eliminate it. Therefore, the question is often how to mitigate market price risk and what to do when it starts to become a severe problem.
The goal of any investment is to make money. However, the risk associated with the practice of investing is real and will mean there will always be some losers. The ultimate question is to determine how much price risk is worth the potential rewards. This may be a little different for each investor and can even be different for the same investor, depending on what their goals are with an investment project.
Price risk management is meant to help lessen any potential impacts of devaluation. This may be done with a standing order to a stock broker, for example. In this case, an investor may have a broker sell a stock once its value drops to a certain level. Often, this order is given well in advance of a price drop. This helps prevent any further losses, but will not recoup any loss of value up to that point. If the value of the stock starts to increase, there may be a standing order that dictates when to repurchase that stock.
Another strategy of price risk management is to diversify a portfolio. Diversification will often involve the purchase of stock from two industries that are somewhat opposed to each other in their function. For example, if an airline stock is doing badly, perhaps a stock dealing in some other sort of mass transit area, such as bus travel, may be doing better. Therefore, finding a good balance could help reduce some of the price risks.
The question of how much price risk one is willing to put up with may be a function of where they are in their investing lives. Those that are using investments as a way to collect money for retirement and are first starting out will likely be more inclined to put up with a greater risk. However, those who are closer to retirement will not be willing to put up with the same amount of risk simply because there is less time to recover it.
