6 Risk Management Strategies in the Stock Market

By Advisorymandi
13-September-2018 12:18:25 PM
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Even the most gifted and professional investors and traders believe that risk management is the important stock market strategy to minimize the risks and maximize the returns.  Technically, risk management is the process of identifying, assessing, and controlling the risk and then develops strategies according to them. Even the pro traders understand the importance of risk management. Trading is a zero-sum game where one is always a winner and one is always a loser. The only difference is the understanding of risk management. If one thing all investors can agree on is, “Without risks, there can be no gains”. Therefore many investors use the stock market risk investment strategies to minimize the risk and maximize the gain.

In this article, we will discuss the risk management strategies in the stock market. But, before we go any further we would like to discuss the types of risks first. At least, you need to know what you are dealing with.

 

TABLE OF CONTENT

 

What are the Risks in Stock Investment?

  • Market Risk
  • Inflation Risk
  • Liquidity Risk

What is Risk Management Strategies?

  • Follow the Market Trends
  • Portfolio Diversification
  • Stop Making Hasty Decisions
  • Planning Your Trades
  • Stop-Loss (S/L)
  • Take-Profit (T/P)

Final Thoughts

 

What are the Risks in Stock Investment?

It has been seen that many people refuse to invest in the stock market because of the many risks associated with it. The result, the confidence of potential investors crumbled and consequently, they’re excluded from the stock market.

Instead of keeping the distance, the trick is to understand the market and be fully aware of all types of the risks. Generally, you can evaluate an investment by analyzing three types of risks:

  • Market Risk
  • Inflation Risk
  • Liquidity Risk

 

Market Risk

Market risk also called systematic risk. Bubbles and crashes are good examples of market risk. Diversification won’t exactly help in eliminating the market risk but hedging can help. So, point is, eliminating systematic or market risk is not possible but one can minimize the impact.

 

Inflation Risk

Inflation risk also called purchasing power risk which results from the fall and rise of prices of goods and services over time. To minimize it, one can invest in inflation-protected securities to minimize inflation risk.

 

Liquidity Risk

As a name suggests, it is the risk of liquidity. When an investment can’t be bought or sold easily enough to prevent or minimize a loss. Even in order to minimize it, one good technique is diversification.

Now that you are aware of different types of risks, it is time to discuss some simple strategies that can be employed to mitigate the risk in a stock market.

 

What is Risk Management Strategies?

The strategies are as follows:

Follow the Market Trends

You must’ve crossed some investor who believes that going against the market trend can yield high returns. If you believe in same too, then you are absolutely wrong! Follow the market trend is one of the best free stock market tips you can ever get. This is a proven formula to minimize the risks in a stock market. The only difficulty with this strategy is to identify the market trends. Not all investors can identify the market trends. It is because the market is volatile and dynamic. One who can spot trends can minimize the investment risks with ease.

 

Portfolio Diversification

Investment portfolio diversification is another important risk management strategy where you can diversify your portfolio by opting for other financial products such as equities, bonds, mutual funds, and derivatives. Further, it can be achieved by including financial products offered by different firms belonging to recognized sectors. The reason behind diversification is to manage the investment from market fluctuations and protects overall returns. By chance, if a specific sector or company is not performing well, the other investments can maintain the balance within the investors’ portfolios.

 

Stop Making Hasty Decisions

A stock market investor must be patient while making decisions regarding his/her own investment. Several times, it has noticed that many investors tend to make quick decisions with every small movement in the stock prices. Moreover, investors forget to adhere to is taking the time to do their own research and due diligence before making their investment decision. Every investor must decide on short-term and long-term objectives to get maximum returns at minimum risk.

 

Planning Your Trades

Whether it is a war or stock market, you need to keep this in mind that “Planning & Strategies helps in win wars”. With a pre-planned strategy, one can change the tides of the stock market in any direction. But, before that, you need to make sure that your broker is the right choice for frequent trading. Because you don’t want to end up with a customer who has high fees and less active traders tools.

 

Stop-Loss (S/L)

Stop-Loss is one of the two key ways in which traders can use to plan ahead when trading. A stop-loss is an advanced order to see an asset when it reaches a specific price point. It is an order which places by the broker of an investor to sell a security when it reaches a pre-set price limit. To do that investor pays a fee to the broker for placing a stop-loss order.  It is a tool which recognized for minimizing the risks while using for short-term investment planning. Most investors use this tool to limit the loss of their investments.

 

Take-Profit (T/P)

Take-Profit is another one of the keys in which trader decides to sell a stock and take a profit on the trade. It is beneficial when there is the possibility of further price increase is huge. Profit booking on stocks near the resistance levels after the certainty of large gains tells that investors sell these before prices begin to decrease.

 

Final Thoughts: –

Hope, this article helped you in a way you expected it to be. So, don’t forget how awesome or expert you are, you will various challenges while trading or investing in the stock market. In fact, even the best investors lose money on their investments which by the way is the vital part of investing experience. Thus, risk management is so essential to your investment in the stock market.

The risk management strategies which we mentioned are not hard to implement. Smart investors not only take advantage of those strategies but also timely use to ensure to mitigate risks and maximize profits in their investments. Therefore, having a risk management strategy will allow you to enjoy your trade or investment fully.

Nevertheless, if you have any query or would like to add something up then don’t forget to mention in the comment section below.

 

Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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