There was a time when stock trading was considered so risky that it was equated with gambling. The reason why it does not carry that stigma any longer is because of the evolution of risk management techniques in stock trading. Still stock trading involves numerous risks if the investor is not careful. Stock trading remains imbued with several risks all the time.
The most visible, talked about and common risk in stock trading comes from the volatility of stock market. Stock market pundits are often taken off guards when volatility strikes like an unexpected tsunami and sweeps away all the precautions and predictions in no time. Besides the volatility, there are some other risks also:
The first and foremost risk is inherent in the stock market itself. Market corrections and bear markets cause havoc to numerous investors who just throw in the towel and lock in their losses. When the market correction takes place, it takes a toll of 10% to 20% of the market value of the stocks.
Risks associated with interest rates confront the investors all the time especially when the prices fall due to the increase in interest rates. If the interest rates rise significantly, people tend to sell off their equities and invest in fixed income securities such as high yielding bonds and other money market funds When there is a wide spread sale of shares, the value of the stocks falls. This causes loss to the investors especially those who have bought the stocks at higher rates.
The third risk emerges from the value of currency. When the currency grows stronger people experience loss on their foreign securities. Conversely, when the rates of the local currency fall, the investors get bonus in terms of increased returns on their investments. Constant fluctuations in currency rates affect the investors who hold the funds for shorter terms.
Any investor, who does not diversify his investments and puts all his eggs in one basket, especially when he invests all his money in equities, is likely to bear the brunt when the market falls. Short-term investors who take loans to invest in equities suffer most.
Most of the stock market investors cannot successfully manage their investment portfolios since they lack the expertise of investment specialists. They cannot anticipate the market trends and suffer losses.
Besides these, some risks are related to certain sectors of investments. People who invest in narrowly focused sector portfolios such as health care etc are exposed to losses.
Changes in tax laws can also reduce the value of your holdings.
How to manage risks in stock trading?
1. Slow and steady wins the race.
The adage holds good in every area of human activity including investments in stock trading. If you sow a seed of investment cautiously and continue to water it regularly with funds, your money plant can grow steadily, flower and blossom in time to provide fruit and shade to your entire family over your life time. The only virtue required is patience, forbearance and regular investment. This virtue beats all stock market punditry.
You can secure your future even if you are not overflowing with funds. You can make small yet regular investments even in high value equities. The only need is to find a stock broker who can provide you the right mechanism of fractionalized investments. You do not have to buy shares in big bunches, say, of at least 100 high value shares of a stock in one go. You can buy one share or even a fraction of a share. In this way you can diversify your investment in numerous high value stocks with strong fundamentals which can withstand the vicissitudes of unpredictable and volatile market.
2. Weed out the laggard stocks
Vigilance is not only the price of your personal security, it is also essential for every stock market trader. You must keep a constant watch over the performance of your portfolio. It is better to weed out the stocks that perform poorly over a period of time.
3. Use cost averaging techniques
An intelligent investor spares some amount of his income for regular investment on monthly basis in specific stock. It is a great way to build wealth and face the highs and lows of the market which are an inevitable part of stock trading.
The most visible, talked about and common risk in stock trading comes from the volatility of stock market. Stock market pundits are often taken off guards when volatility strikes like an unexpected tsunami and sweeps away all the precautions and predictions in no time. Besides the volatility, there are some other risks also:
The first and foremost risk is inherent in the stock market itself. Market corrections and bear markets cause havoc to numerous investors who just throw in the towel and lock in their losses. When the market correction takes place, it takes a toll of 10% to 20% of the market value of the stocks.
Risks associated with interest rates confront the investors all the time especially when the prices fall due to the increase in interest rates. If the interest rates rise significantly, people tend to sell off their equities and invest in fixed income securities such as high yielding bonds and other money market funds When there is a wide spread sale of shares, the value of the stocks falls. This causes loss to the investors especially those who have bought the stocks at higher rates.
The third risk emerges from the value of currency. When the currency grows stronger people experience loss on their foreign securities. Conversely, when the rates of the local currency fall, the investors get bonus in terms of increased returns on their investments. Constant fluctuations in currency rates affect the investors who hold the funds for shorter terms.
Any investor, who does not diversify his investments and puts all his eggs in one basket, especially when he invests all his money in equities, is likely to bear the brunt when the market falls. Short-term investors who take loans to invest in equities suffer most.
Most of the stock market investors cannot successfully manage their investment portfolios since they lack the expertise of investment specialists. They cannot anticipate the market trends and suffer losses.
Besides these, some risks are related to certain sectors of investments. People who invest in narrowly focused sector portfolios such as health care etc are exposed to losses.
Changes in tax laws can also reduce the value of your holdings.
How to manage risks in stock trading?
1. Slow and steady wins the race.
The adage holds good in every area of human activity including investments in stock trading. If you sow a seed of investment cautiously and continue to water it regularly with funds, your money plant can grow steadily, flower and blossom in time to provide fruit and shade to your entire family over your life time. The only virtue required is patience, forbearance and regular investment. This virtue beats all stock market punditry.
You can secure your future even if you are not overflowing with funds. You can make small yet regular investments even in high value equities. The only need is to find a stock broker who can provide you the right mechanism of fractionalized investments. You do not have to buy shares in big bunches, say, of at least 100 high value shares of a stock in one go. You can buy one share or even a fraction of a share. In this way you can diversify your investment in numerous high value stocks with strong fundamentals which can withstand the vicissitudes of unpredictable and volatile market.
2. Weed out the laggard stocks
Vigilance is not only the price of your personal security, it is also essential for every stock market trader. You must keep a constant watch over the performance of your portfolio. It is better to weed out the stocks that perform poorly over a period of time.
3. Use cost averaging techniques
An intelligent investor spares some amount of his income for regular investment on monthly basis in specific stock. It is a great way to build wealth and face the highs and lows of the market which are an inevitable part of stock trading.
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