In this article, we will discuss dealing with risks … or the so-called “risk management approach”, and we will learn about risk management, its steps and the benefits that investors get from understanding and dealing with risks.
When you give your portfolio to a poor investment company or manager who can’t identify risks, or his risk management skills are insufficient, what is his expected outcome?
There are significant negative effects on it, such as: loss of investment or even bankruptcy, penalties for non-compliance, loss of a license to provide financial services, damage to the company’s reputation and the reputation of the employee.
From here we need to understand the meaning of risk management.
Definition of risk management:
Risk management is an iterative process that organizations use to support and define risk management with the goal of minimizing negative events while developing plans to provide opportunities to achieve company goals.
Risk management plays an important role because it provides value to shareholders and investors, and secures their money and investments, as the main function of risk management is to find a balance between risk and return.
This will be done by helping managers navigate uncertainty and identify threats and opportunities facing the company.
Risk management processes help companies reduce the likelihood and severity of adverse events and enhance management’s ability to seize opportunities…
In a clearer sense:
The risk management process provides a method for identifying and prioritizing risks; They state the likelihood and potential severity of risks, and outline the actions that investors must take if a risk occurs, which we call prevention or mitigation measures. It also provides constant monitoring and makes adjustments when it’s important.
Steps in the risk management process
The structured risk management process generally consists of five steps:
(Defining objectives, discovering and defining events, defining responses to risks, assessing and prioritizing risks, controlling and monitoring risks). We’ll discuss it in detail and start with:
Step one: Set goals
The main function of risk management is to identify events that may occur and affect the achievement of the company’s objectives.
It may be difficult for the company to influence and control certain risks because they are based on issues and events outside the company’s management.
Moreover, a robust risk management process helps corporate managers make the right decisions and ultimately ensure that their goals, which are profits, are achieved.
Step two: Detect and select the event
What is meant here is an event that affects the achievement of the company’s goals, the outcome of the event may be negative – possibly leading to a loss of profits or assets – or positive.
Step Three: Assessing and Prioritizing Risks:
The expected frequencies and severity of different outcomes can be determined, and this type of risk can be used to prioritize risks and select appropriate risk responses for each identified risk.
Step four: Control and Monitor:
Here we refer to a set of activities that must be monitored and monitored in order to be carried out in a timely manner by the portfolio manager, the relevant information of which must be accurately identified, recorded and reported to enable investors to carry out their duties.
What is the point of risk management as long as the risk already exists?
Risk management has many benefits, risk management must also have employees, and it is important to remember that it costs the company a lot of money
The result is as follows:
Helping you support strategic planning and business planning.
Reducing the risks faced by the company.
It prevents undue risks and potential losses and reduces the possibility of bankruptcy
Provide process discipline in the operation of the company.
Help you improve performance appraisal and ensure that the compensation system is in line with the company’s risk tolerance.
Helping you improve communication, increase transparency, and increase awareness and understanding of risks.
It helps you detect illegal and fraudulent activity early.