Articles

	Risk management

None of investment companies, which advertise in the Internet, provides any information about risks.  And even if they do, they mention that at the very end. The clients get to know they take all the risks post factum, after all the promotional offers. They just tell them about huge (profitable?) profit ratios, unimaginable increase in share dividends, uniqueness of the current moment, etc. The clients believe this and then they realize that there is a huge risk and no one is going to protect them against it. In major investment companies a risk manager is the central figure. If a risk manager stops a transaction, no one has the right to continue the investment, even if it may seem profitable. Investment companies with professional risk managers always suffer fewer losses even in crisis situations or when the market is falling.

Crisis situations generally have characteristic features and the falling of the Russian, Chinese and American stock markets was quite predictable. A rapid exponential increase of the market ends sooner or later. During a short time the Dow Jones index increased by 1,800 points breaking the key resistance of 11,850 points. The Chinese stock market also experienced large increases, and the Russian stock market was supposed to get corrected by 2,000 points. Obviously, the major investment companies run by professional risk-managers decided to freeze the profit and “enter into money”. This brought about a chain reaction of protective orders. This can be seen in the current situation in the stock market. When shares fall by 5-6% during a session, it becomes obvious that major players are leaving the market. Only using professional risk management you can avoid losses in the falling market.

An illustrative situation occurred, for instance, with gold. Major investment companies were buying gold from very low (in comparison to the current) levels of 530-550 dollars per ounce. When gold reached 690 dollars they took the profit. After that within a few hours gold crashed to 637 dollars per ounce, i.e. by almost 10%. This is a lot. This indicates that amateurs continued to play on the trend continuation and professionals left it.

The risk here is that the behaviour of professionals is, as a rule, hard to predict. Professionals are always thinking more of the preservation of the capital than about profits. An investor with a small capital does not think about risk. He thinks about profits. Those who manage huge capitals are first thinking about their preservation and only then about profits.