Limited Risk

Limited Risk

The risk of an investment that has a predetermined maximum downside potential, which is usually the initial amount invested.

Notes:

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 long position in a stock has limited risk because the investor can lose no more than the initial amount invested. Similarly, option contracts have limited risk as only the initial premium paid for the option can be lost.

See also: Beta, Eat Well, Sleep Well, Long Position, Return, Risk, Risk Capital, Risk/Return Trade-off, Systematic risk, Unsystematic Risk

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Limited risk

The risk inherent in options contracts, which is much lower than that of a futures contract, which has unlimited risk. The maximum loss in buying a call option, for example, is the premium paid for the option.