What is Value at Risk (VaR)?
An estimate of the most you would expect to lose on a normal bad day, at a chosen confidence level.
Educational — not investment advice
Value at Risk answers a narrow question: "over a given period, with a given confidence, what is the most I should expect to lose?" A one-day 95% VaR of $500 means that on 19 out of 20 normal days, your loss should not exceed $500.
It is popular because it compresses risk into a single, comparable number. You can put the VaR of two portfolios side by side and get a rough feel for which one swings harder.
The trap most people miss
VaR tells you where the bad day begins, not how bad it gets past that line. The 1-in-20 day can be far worse than the VaR figure — and market crashes live entirely on that far side. Treat it as a doorway, not a wall.
Frequently asked about Value at Risk (VaR)
Is a lower VaR always better?
Lower VaR means smaller expected losses on normal days, which is generally safer — but it says nothing about the rare, severe days, so two portfolios with the same VaR can have very different worst cases.
What confidence level should I use?
95% and 99% are the common choices. A 99% VaR is larger because it captures a rarer, deeper loss. Neither describes the true tail — they just move the doorway.
Related terms
Guides that use Value at Risk (VaR)
See your own portfolio’s Value at Risk
Add what you hold and Tradune estimates historical and parametric Value at Risk at 95% and 99% on your actual positions, with historical VaR also in dollars.
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This definition is for educational purposes only and is not investment, tax, or financial advice. Concepts are explained in general terms; how they apply to your situation can differ. Always do your own research.