Risks and rewards of stock trading are intricately connected. As such, risk comes naturally in all financial instruments. While you may have control over some of these risks, others you can only shield against. These are shifts that affect the economy or the market and call for the investors to adjust their portfolios or get out altogether.
Below, we’ve put together 3 major types of dangers that stock traders face and some tactics, where applicable, which you can employ to counteract such risks.
1. Volatility/ Market risk
Market risk refers to fluctuations in cost of securities or portfolios over a one-year period. Every security is subject to volatility that includes events beyond your control. They include:
· Inflation - Inflation impacts investors that are afraid of taking risks; those that fail to invest in monetary vehicles that increase in price every year. As a result, they end up losing money to the upward fluctuations that inflation causes.
· Marketability - How liquid is your investment? You need to be able to sell your investment whenever you want to do so, otherwise, your target selling point will not mean much.
· Currency translation - This becomes a risk when you buy and sell foreign stocks since you then must worry about fluctuations between the value of the currency in the country that holds the company and your local currency.
2. Investment risks
Investment risks associate directly to how you place your investments and manipulate your entry and exit trades. Investors have, in the past, approached trading with emotions, a mistake that has led to carelessness, and assumption of unneeded risks. Success in the stock market is the result of logic and analysis. Overconfidence can easily provoke any of the following;
· Failure to distinguish your biases - Biases are present in everybody. Being biased can result into following the herd and giving preference to info that affirms your viewpoint.
· Concentration in a single industry or stock - Being too sure can lead you to put all your eggs in one basket leaving you vulnerable to volatility, especially in the short-term.
· Excessive leverage - Greed and certainty about the correctness of your investing decision can lead to trading on margin, or borrowing to maximize your profits.
· Being on the sidelines - This doesn’t always guarantee a win. Furthermore, you don’t want to find yourself out of the market during a major market move.
There’s nothing wrong with being confident. However, ensure you counter these investment risks that result from being overconfident by; spreading your risk, buying and holding, and steering clear of borrowing.
3. Timing
Buy low, sell high.
You’ve probably heard of this term before. Good advice, perhaps, but just how easy is it to implement seeing that market prices are constantly changing? Any investor who has tasted the losses of trading knows the frustration of buying a stock at its highest value or selling at its lowest. Trying to predict prices in the future is an uphill battle, if not impossible. An investor to beat the market over any considerable period is not something we are likely to see any time next year or 5 years after, for that matter.
Bottom line
It’s not what you make, it’s what you keep that matters.
Another famous stock market quote. This saying shines light on the need to cut down risk to the minimum during investing. Achieving substantial stock market profits, just to lose them to a disastrous event is crushing and uncalled-for. Approach every trade cautiously and from a different viewpoint as each trade is unique and has its own dangers and possibilities.
Andrew Carnegie is reputed to have said, “The safest investment strategy is to put all of your eggs in one basket and watch the basket.” However, LiveTrade considers the popular way to manage risk is to diversify your exposure. Specially, LiveTraders can even purchase stocks of Apple, Google, or Facebook. What would be greater than owning stocks of different companies, sometimes different countries?
