5 tips for lowering your stock investment risk
The whole idea of investing in stocks can be testing and rewarding at the same time, depending on how well you navigate or read the market. The intricacies of investing are complicated by the presence of brokers, financial advisers and other interested parties who always push to have their way. According to Forbes Magazine, there are a few facts stock market investors need to know when entering the market. First, owning a company stock makes you an owner of the company; therefore an important entity in the operations of the company. Secondly, the ownership means you will be paying taxes on the proceeds of your dividends and trade yields.
Stocks do and rise and fall as a result of a number of reasons, key among them value investing and market momentum. Value investing is the idea of purchasing temporarily glum stocks in the hope the price will rise while momentum investing is buying more promising stocks. The forth crucial reality every investor needs to know is that stocks can be highly volatile. For instance, stocks are much more volatile compared to bonds, even though they tend to appreciate in value over time. If you have made the decision to invest in stocks, below are 5 strategies that can help you lower your stock investment risk as listed by Investopedia.com.
The 5 Tips
Many investors are diversifying their portfolio as a strategy to mitigate against the risk of losses. The strategy involves spreading your capital across various companies and industries. For example, you can buy stocks from diverse number of sectors such as financial, retail, healthcare, real estate and mining.
2. Dollar cost averaging (DCA)
Seasoned investors use this disciplined strategy to protect their investments in a down market, especially where price fluctuations are adverse. Under this strategy, an investor places a fixed amount of dollars in shares for a stipulated period. Depending on the market performance, the investor will receive a lower number of shares if the stock price rises and a higher number of shares if the stock price drops. Investors who use this strategy often carry the assumption that the stock prices will drop during the investment period.
3. Hedging your portfolio
This crucial strategy offers investors a form of indemnity cover against risks that could spell economic disaster. It is important to note that the strategy will not have a bearing on the outcome of your current investments. However, it does offer an alternative route through which you can protect your investment portfolio. Some of the market segments you can consider for your hedging include options trading, forex market, commodities and lucrative precious metals such as gold, silver and copper.
4. Investing in bonds
Bonds are widely preferred for long term investment because they promise a set amount of yield over a given timeframe and are less prone to short term price fluctuations compared to stocks. Although bonds have lower returns compared to the equities they always act as a more reliable cushion for investors in times of economic uncertainty. Since bonds usually take many years to mature, the strategy is more popular with older and richer investors who have been in the market for a longer period.
5. Dividend reinvestment plans (DRIPs)
DRIPs are long term investment plans that give investors the opportunity to reinvest the cash dividends they have received from stocks back into buying more shares at discounted rates. The shares are mostly offered on commission free exchanges, but fall within the stipulated dividend payment date. Several corporations offer DRIPs to their employees as a strategy to help employees diversify their portfolio and increase investment value.
When taking measures to protect your investment, there are three important things you need to put in mind; your investment time frame, risk tolerance levels and capacity to make changes to your investment allocation. That’s something investment websites talk way less about than they should, something I really see in the comments on my danish investment blog, mininvestering.dk. The investor’s risk tolerance level takes into consideration both financial and emotional limits of bearing losses. A more tolerant person is therefore more likely to take bigger risks. Finally, to make the best out of your investment, you may be forced to make changes to your allocation from time to time in order to meet your circumstances in life and market changes.