Risk Management & Key Concepts Flashcards
How do stop-loss orders work in risk management?
Stop-loss orders automatically sell a stock if its price falls to a certain level, helping limit potential losses.
What is position sizing in risk management?
Position sizing is determining how much capital to allocate to each trade based on the level of risk and the size of your overall portfolio.
What is the risk-to-reward ratio in trading?
The risk-to-reward ratio compares the amount you risk to the potential reward. A good ratio is typically 1:3 (risking $1 to potentially make $3).
Why is risk management crucial in trading?
Risk management helps protect your capital from large losses and ensures that winning trades can compensate for losing trades.
What does the P/E ratio tell you?
The P/E ratio compares a company’s stock price to its earnings per share, helping investors assess whether a stock is overvalued or undervalued.
What is the P/B ratio?
The P/B ratio compares a company’s market price to its book value, helping assess if the stock is trading below its actual asset value.
What is a margin of safety in investing?
The margin of safety is the difference between the intrinsic value of a stock and its market price, providing a cushion against errors in analysis.
