How to reduce risk of stock market investment? Expert decodes – highlights top 4 key pointers
There are risks involved with stock market investments, but they can also be managed by anyone willing to learn and practice these tips.
By - Rahul Jain, President & Head, Personal Wealth, Edelweiss Wealth Management
Stock market investing is a risky business. While the risk can be reduced, it cannot be eliminated completely. Even if you are an experienced investor, there will be times when your strategy goes awry, and things don’t go as planned.
There will be ups and downs. However, that doesn’t mean you should give up on investing in stocks forever. As with any venture, there are risks involved with stock market investments, but they can also be managed by anyone willing to learn and practice these tips.
Diversify Your Portfolio
This is the first and foremost tip to reduce stock market investment risk. Diversification is one of the critical fundamentals of investing. It means you don’t just invest all your money in a single company or industry. You invest the money across sectors, asset classes, and investment types – including stocks, bonds, real estate, commodities, and more.
Diversification helps reduce risk in several ways. First, it helps spread out the risk of any single investment going sour. If you put all your money into one stock and that company goes bankrupt, you lose all that money. If you diversify, even if one investment loses money, the others may make enough to offset the loss.
Use Stop Losses
A stop loss is a highly effective risk management tool. A stop loss is an order to sell a particular investment at a specified price. Usually, the investor will specify a stop loss price that is at or below their purchase price.
They will sell the investment at the specified price. With a stop loss order, you don’t have to worry about what the future holds for a particular company or if your analysis is correct. It is a fail-safe method of locking in a portion of your investment at a given price.
Research and Due Diligence is Key
Insufficient research and due diligence are the biggest risk in stock market investments. A good rule of thumb is to look for a company that has been in business for more than one year. New companies don’t have a track record. They don’t have the experience needed to make a product that people want to buy consistently. So, it is difficult to know if their product will be a success.
A good rule of thumb is to look for a company that has been in business for more than one year. New companies don't have a track record. They don't have the experience needed to make a product that people want to buy consistently.
Don’t Try to Time the Market
Some people believe that you should invest in stocks when the market is low and withdraw your money when the market is high. This is a risky approach as you can’t really forecast what the overall market is going to do. You might see a dip and then the market bounces right back.
Or, if you are lucky enough to time the market correctly, you might happen to pick the exact low point in the market and miss out on the growth that follows. Instead, you should have a long-term strategy for investing. You should have an investment plan that lets you stay invested in the market even when it’s sputtering.
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