Risk Management Strategies In The Stock Market
Even the most professional investors believe that risk management is an important stock market strategy to minimize the risks and maximize returns.
Technically, risk management is the process of identifying, assessing, and controlling the risk and then develops strategies according to them. Even the pro traders understand the importance of risk management. Trading is a zero-sum game where one is always a winner and one is always a loser. The only difference is the understanding of risk management. If one thing all investors can agree on is, “Without risks, there can be no gains”. Therefore many investors use the stock market risk investment strategies to minimize the risk and maximize the gain.
In this article, we will discuss risk management strategies in the stock market. But, before we go any further we would like to discuss the types of risks first. At least, you need to know what you are dealing with.
What are the Risks in Stock Investment?
It has been seen that many people refuse to invest in the stock market because of the many risks associated with it. The result, the confidence of potential investors crumbled and consequently, they’re excluded from the stock market.
Instead of keeping the distance, the trick is to understand the market and be fully aware of all types of risks. Generally, you can evaluate an investment by analyzing three types of risks:
Market risk also called systematic risk. Bubbles and crashes are good examples of market risk. Diversification won’t exactly help in eliminating the market risk but hedging can help. So, point is, eliminating systematic or market risk is not possible but one can minimize the impact.
Inflation risk also called purchasing power risk which results from the fall and rise of prices of goods and services over time. To minimize it, one can invest in inflation-protected securities to minimize inflation risk.
As a name suggests, it is the risk of liquidity. When an investment can’t be bought or sold easily enough to prevent or minimize a loss. Even in order to minimize it, one good technique is diversification.
Now that you are aware of different types of risks, it is time to discuss some simple strategies that can be employed to mitigate the risk in a stock market.
What is Risk Management Strategies?
The strategies are as follows:
Follow the Market Trends
You must’ve crossed some investor who believes that going against the market trend can yield high returns. If you believe in the same too, then you are absolutely wrong! Follow the market trend is one of the best free stock market tips you can ever get. This is a proven formula to minimize the risks in a stock market. The only difficulty with this strategy is to identify market trends. Not all investors can identify market trends. It is because the market is volatile and dynamic. One who can spot trends can minimize investment risks with ease.
Investment portfolio diversification is another important risk management strategy where you can diversify your portfolio by opting for other financial products such as equities, bonds, mutual funds, and derivatives. Further, it can be achieved by including financial products offered by different firms belonging to recognized sectors. The reason behind diversification is to manage the investment from market fluctuations and protects overall returns. By chance, if a specific sector or company is not performing well, the other investments can maintain the balance within the investors’ portfolios.
Stop Making Hasty Decisions
A stock market investor must be patient while making decisions regarding his/her own investment. Several times, it has noticed that many investors tend to make quick decisions with every small movement in the stock prices. Moreover, investors forget to adhere to is taking the time to do their own research and due diligence before making their investment decision. Every investor must decide on short-term and long-term objectives to get maximum returns at minimum risk.
Planning Your Trades
Whether it is a war or stock market, you need to keep this in mind that “Planning & Strategies helps in win wars”. With a pre-planned strategy, one can change the tides of the stock market in any direction. But, before that, you need to make sure that your broker is the right choice for frequent trading. Because you don’t want to end up with a customer who has high fees and less active traders tools.
Stop-Loss is one of the two key ways in which traders can use to plan ahead when trading. A stop-loss is an advanced order to see an asset when it reaches a specific price point. It is an order which places by the broker of an investor to sell a security when it reaches a pre-set price limit. To do that investor pays a fee to the broker for placing a stop-loss order. It is a tool which recognized for minimizing the risks while using for short-term investment planning. Most investors use this tool to limit the loss of their investments.
Take-Profit is another one of the keys in which the trader decides to sell a stock and make a profit on the trade. It is beneficial when there is the possibility of further price increase is huge. Profit booking on stocks near the resistance levels after the certainty of large gains tells that investors sell these before prices begin to decrease.
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Article partially published on advisorymandy.com
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