How to Reduce the Risks of the Stock Market

 

 

By Justin Weinger

The digital world has opened the door to countless opportunities for making and managing your money. You can do your banking online, invest in companies with nothing but an online account, and even make trades with a couple of clicks on a mouse. However, one thing that the internet can’t do, is remove all of the risk from your wealth building strategy. The unfortunate truth is that everything in life has its share of risks. There’s always a chance that you could lose money or make money on the path to success. A lot of investors look at their practices a lot like a standard career. Some people will make it out on top and get rich in the process. Others will be able to manage somewhere in the middle, and some might even fail completely. The key to avoiding that last eventuality, is making sure you have the right strategy.

Developing a Strategy for Trading

If you want to avoid having more losses in your portfolio than wins, the first thing you need to do is research. Learn everything you can about the different kind of trading. Are you interested in forex, stocks, or securities? Is it better for you to take an active or passive approach to building your portfolio? How much risk can you reasonably afford to handle, and what do you feel more comfortable with when it comes to buying and selling?

The more you research, the more confident you’ll be when the time comes to set a budget. Remember, even if you feel that you’re pretty skilled at handling the stock market, you should never allocate more than 10% of your portfolio to just one trade. There’s a good chance that this route will expose you to excess volatility, and you could stand to lose a lot of money. It’s also important to remember that you should never use money that you need for the near-term, and never invest money that you can’t afford to lose. It’s also worth making sure that you have an emergency fund in place to protect you before you start trading.

Practice Before You Jump in Head-First

Once you’ve got a good idea of how much you can afford to spend, think about the kind of circumstances you would need to be in place to buy a share of something, and what kind of circumstances would push you to a sale. This will tell you when to get in and out of various positions. You can use this information, along with your risk analysis and knowledge of the markets to begin building a long-term strategy for how to use your money.

Remember, even if you think your strategy is brilliant, put it to the test first. There are paper trading and demo accounts available from brokerage companies today that can give you the freedom to experiment with your ideas, without wasting any cash. Demo accounts are one of the biggest bonuses that the digital world has brought into the investing environment. Make sure that you’re winning most, or all of the time on your paper trades – then you can begin to spend your money on real risks.

 

Justin is a married father of 3, with over 15 years of corporate finance experience in various industries. He is an avid personal finance enthusiast, blogger, and chaser of passive income streams. 


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