Risk - Is it Constant?

 Updated on 7 July 2025

 

Risk – Is It Really Constant? (2025 Refresh)

Recently, during a lunch with a friend, we got talking about the stock markets and the perceived risks.
That casual chat spiralled into a rapid-fire Q & A session that reminded me why risk is both mathematically equal for every trade and psychologically unique for every trader. Here’s the gist, updated for today’s markets.

 

“Can I calculate risk before I buy?”

My friend’s first salvo was: “How do I take calculated risks while buying stocks?”
We can’t measure market risk with stopwatch precision. Our lifetime, knowledge-processing power, money, and energy are all finite, while the variables moving stock prices are practically infinite. The game isn’t perfect calculation; it’s smart mitigation. Think of risk like monsoon rain: you can’t track every droplet, but you can carry an umbrella, choose your route, and avoid open drains.

 

Why the same trade feels different to two people

In any transaction the paper risk–reward is identical because buyer and seller meet at the same price. Yet the felt risk diverges wildly. One trader may accept a larger rupee draw-down for a bigger upside, another trims both profit target and stop-loss to sleep better. The spreadsheet says risk is constant, but nerves say otherwise.

 

The risk-appetite parabola

Visualize risk appetite on a graph with risk on the Y-axis and age on the X-axis. The curve forms a soft parabola.

Early career years are filled with enthusiasm but thin capital, so even small losses sting.
Peak earning years bring bigger capital and steady income, and that raises tolerance for calculated risk.
Approaching retirement, the nest-egg becomes irreplaceable, so caution rises again.

Draw a horizontal line through that curve and you’ll hit it twice, proving the same numerical risk feels different at two life stages.

 

Practical take-aways for 2025

Position size matters more than prediction. Decide the rupee amount you are genuinely willing to lose before you buy.

Diversification the boring way—equity, debt, gold, perhaps an international fund—still works best.

Automate exits with preset stop-loss and target orders so adrenaline at 9:15 a.m. never makes the decision for you.

Re-balance at least once a year; the fastest-growing asset now carries the most portfolio risk.

Keep a written trading checklist and read it every single time before pressing “buy” or “sell”.

 

A quick thought experiment

Suppose we both buy XYZ Ltd. at ₹ 900.

You aim for ₹ 960 and accept a stop at ₹ 870. Your risk–reward sits near one-to-two.

I aim for ₹ 1 080 and accept a stop at ₹ 840. My risk–reward is roughly one-to-three.

On paper my trade risks more cash, but the larger expected upside compensates. Which plan is safer? It depends entirely on whose pillow stays fluffier at night.

 

The bottom line

In our lives (and so in the stock markets), we are always living (and trading) by guesstimates and approximations of a huge number of variables.
That hasn’t changed. What has changed is our toolkit for mitigation. Focus there, not on perfect foresight.

Action step: Note the rupee amount that would hurt but not paralyze you if lost today. That is your personal risk line. Re-evaluate it once a year, because life moves and so does that line.

Disclaimer: Educational content only. Please consult a SEBI-registered adviser for personalized advice.

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Recently, during a lunch with a friend, we got talking about the stock markets and the perceived risks.

Some of the questions my friend posed during the conversation and my responses is what I have tried to re-capture here.

How do I take calculated risks while buying stocks? I feel that we can't 'calculate' risks especially in the stock markets. We can employ strategies to mitigate the risk but not necessarily 'accurately' calculate it. Our lifetime is finite, our ability to process knowledge is finite, our money which we can put into the market is finite, our efforts to put all this together is finite. So how can we manage or for that matter calculate the multiple variables and the infinite combinations thereof which contribute to risk. Focus on risk mitigation.

Why is risk in a trade constant at the same time relatively different?

In any trade the risk for gain and loss for any party is the same. After all, a trade is entered when a buyer and seller agree on a transaction price. Unfortunately, the counter trade is not always with the same party with whom you initiated the trade.

Let's assume that for every trade we enter we are either willing to make or lose in the ratio of 2 : 1.

Now if I enter trade (buy a stock) with the same ratio in mind and I am willing to make Rs 20 and lose Rs. 10.

On the other had you entered the same trade to make Rs. 10 and lose Rs. 5.

In both scenarios, the ratio of win-loss risk is the same but the risk is relatively different. The above ignore the fact of how the risk is valued by the individual (you or me) differently.

If you plotted it on a risk appetite (y-axis) vis-a-vis age (x-axis) graph; the plot of this graph will be more like a parabola (almost).

By drawing a line for any value for risk (parallel to x axis), it will meet at the parabola at 2 different points of the graph. Does it mean that the individual's risk appetite at two points in his life is the same? Actually, it never is. Here again, risk is the same but it actually is different.

I may have oversimplified my case above and there will be enough number of people who will argue against it but then complicating any situation need not necessarily gave you a more accurate answer.

In our lives (and so in the stock markets), we are always living (and trading) by guesstimates and approximations of huge number of variables. We try to improve our approximations by making some of the variables as constants. This is nothing but an act of risk mitigation than risk calculation.