Stock investment and trading can be risky because the risk is inseparable and inevitable when seeking investment success. No matter how cliche it may sound, “no risk, no return” is a phrase that is a fundamental truth in the trading and investing landscape. In simple terms, risk management can be defined as the process of identifying, analyzing, and mitigating risk factors while optimizing returns. Managing risks doesn’t mean avoiding them completely, but it is all about setting up your risk appetite and how much one can withstand with measured diversification.
A considerable amount of risk factors and volatility is associated with certain security types such as mutual funds, direct equity, forex, commodity & derivatives while you engage in trading via a stock market app. Investors must buckle and strap themselves with necessary risk management strategies to leverage these riskier investment options for increased returns. Let us run down some coping mechanisms and safeguarding strategies for investors to minimize risks.
- Diversify your portfolio: Never put all the eggs in one basket, they say, and it is very much true in the case of investments because, in this way, the money is invested in financial products of different industries and sectors. A diversified basket acts like a shield if a company’s share moves in an unfavorable condition.
- Rupee-cost averaging: One of the effective strategies to build the practice of consistent and disciplined investment is rupee-cost averaging because it requires a standard approach of allocating some money to a particular share. In this way, if the prices are high for those shares, the invested amount will buy fewer shares and vice versa; ultimately, with time the average purchase cost is lowered compared to the return on investment. It is spreading out of investment over time to mitigate the risk of frequent market fluctuations.
- Employing Stop-limit: Stop-limit orders automatically trigger the buying and selling of stocks from the stock market when the set price is reached, which means that a stop-limit price is predetermined to mitigate the risk in case the price falls too low. For example, if someone buys a stock and wants to protect it against potential losses, there are two ways in which a stop limit can be implemented. They are stop-price and limit-price, the former is about setting up a benchmark, and if the price reaches or falls below this level, the order gets triggered. A limit price becomes active once the stop price has been reached. It specifies the minimum price at which stocks can be bought or sold. Hence, the price you wish to receive will be guaranteed.
- Going with the flow of the market: following the stock markets’ trends is the bare minimum an investor can do because once the money is invested into a particular stock, monitoring market trends becomes necessary. So that the investor is well informed about which industry is experiencing a positive trend, and if there are negative trends prevailing in the market, investors will be more cautious. The performance of different assets can be tracked in this way, and it is very beneficial to mitigate potential risks.
- Booking profits in advance: For the stocks nearing their resistance level after showing huge gains, it is always advisable to book profits on them before consolidation occurs and the prices begin to fall.
All successful investors try to contemplate the market’s tide that can turn against them anytime. Knowing the risks in advance helps to assess the endurance level of whether or not it is worth leaping. A comprehensive risk management strategy along with essential investing tools like a stock screener yields a sustainable source of income through investing in stocks.