Risk Management in Stock Market

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Stock Market

As we know, there is various risk involved when we want to invest in the stock market, and for that, there are multiple parameters that we will discuss further to lower the risk. The stock market has always been a platform with high–risk and high–returns, which is why every investor wants to invest in the stock market to gain those capital appreciation benefits. The right decision while investing in the stock market can cut down on losses and gives clues to the investors about the future market trends.

Planning your trades

Planning about trades helps you make decisions and understand when you should make a profit and when you should make a loss. This allows the trader to avoid decisions that they can make emotionally. The trading plan will help the trader trade in the market at a predetermined price that allows them to cut down losses and make a profit.

SEBI registered equity advisors have all the research about the stock performance. They have that much idea which stock will perform better or worse. So as a trader, you can take help from them with a minimal fee and low risk. Planning trades helps you to learn from your old mistakes and improve your judgment for future transactions.

Several parameters can make your trades better:-

  1. Motivation for trading:- First step for starting is if you are interested in trading. Without interest, there are impossible to get inspiration. Without reason, no traders can make the right decision and book a profit for themselves.
  2. Time commitment:- Market is open from 8:35 am to 3:30 pm, so a trader must devote or commit a time for trading in which they can trade without any disturbance. The time commitment for trading can improve consistency and improve patience.
  3. Availability of capital:- Availability of cash is the primary need for any trader. Without it, trading is impossible.
  4. Trading goals:- A trader must have trading goals before they start investing. It clarifies where to support, which stock to trade, and what quantity to buy from the stock exchange.  
  5. Attitude towards risk: A trader must know about the risk-taking capacity, where they should take risks, and when they shouldn’t. A risk-taking attitude defines the trader’s capability towards trading and professionalism.  
  6. Markets you want to trade:- There are two types of needs: where all the stocks are traded with the involvement of the stock exchange, and an OTC (Over the Counter) market in which buyers and sellers sell things directly without the participation of the stock exchange. So traders must first clarify which market they want to trade in and make a profit.

Risk management strategies

  • Portfolio diversification:- Business is uncertain. They may incur loss or profit, and that affects the stock price. To protect all your portfolios, investment constantly diversifies them in multiple stocks. Maybe someday, one stock in your portfolio doesn’t perform well, and on the other side, another store served well. This creates a balanced in your portfolio and saves your portfolio from going down. Make sure at the time of diversification don’t invest in a similar type of stock. Go for those that don’t have similarities. A similar kind of stock may carry the same risk and take your portfolio down.

Remember, diversification does not mean invest in equally in all sectors. Investing in different asset classes may give your portfolio more exposure to grow. Only invest that much of the amount you carry loss about.

  • Hedging:- Derivative instrument like future and option helps you to hedge the risk management in equity. The future option allows you to buy or sell something at a predetermined price. In the end, this helps you fight inflation and market volatility. For example, if you purchase a future option at a current price, then if the price goes up, that does not bother you. You are going to buy that at the same price. The different types of derivative options have other use to hedge risk.
  • Using stop-losses:- Stop-loss alerts the broker that if the stock price falls to a particular level, it automatically sells out. 0This protects you from extensive losses. You have to sit and check whether the price is going down or up. If it goes up, you make a profit, and if it’s falling, it stops at a particular alert level. For example, if you buy the stock for 100 and set a stop loss on 80. The broker automatically sells the stock if the stock price falls to 80. That saves you from further loss if the stock falls below 80.
  • Option for blue-chip:- Normally, small and medium cap companies are more volatile in the market because they carry more investment risk. The companies in blue-chip have to take a low risk, and their stocks carry less volatility. That’s why you get higher returns without much trouble.
  • Invest in dividend-paying stocks:- There are always risks in the equity market, as we know. To protect you from that risk, search for those companies that pay a dividend which means the company’s history is usually vital to pay a premium. Adding those companies to your portfolio can shield you from equity market risk. Most companies pay a dividend. This shows the stability and financial health of the companies, and who don’t, then the market think the companies don’t have peace and good financial health. Investing in those companies that pay dividends can give you a regular income. This will reduce your portfolio risk.

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