Article

Here’s How You Avoid Risks While Trading

18 May 2018

Trading in the stock markets can typically be summed up in two words -- ‘risk’ and ‘reward’. The general rule of thumb is that greater the potential reward, higher is the associated risk. However, this doesn’t hold true in the reverse order; high risk doesn't necessarily mean high rewards. This is why you need to evaluate your risk appetite before trading and also devise strategies to reduce unacceptable levels of risk.

Here are a few fundamental tips that will help you avoid risks while trading in the stock markets.

Diversification

‘Don’t put all your eggs in the same basket’ supports the concept of diversification. Portfolio diversification reduces your overall risk by spreading it over a variety of products. For example, you have invested 25% of your money in ABC shares, 25% in XYZ, and 50% in PQR shares. In this case, if XYZ shares tank, you will only face a loss on 25% of your investment; the profit from the remaining 75% percent will cover this loss. Your risk of loss is considerably lower with diversification than it is with investing your entire corpus in a single stock.

Monitor investments daily, reallocate assets when needed

To earn profits and avoid losses in the stock markets, you need to regularly monitor your investments and the market trend. This will let you know which investments are facing potential risk and you can sell them accordingly, thus circumventing losses. Allocation of financial assets among equity, debt, and alternative assets also helps lower risk while trading. Alternative assets consist of investments in currencies or commodities. For an investor with a moderate risk profile, typical allocation could be 50% equity, 30% debt, and 20% in alternative assets. Consulting a financial advisor like 5Paisa can also help you allocate your resources in a better way.

 

Research

Before trading in the share market, you should conduct a thorough research on your potential investments. Check out the stock's history, earnings, growth, management team, and debt load. Compare the results with other similar investment products and with other assets in your investment portfolio. You could also consider consulting brokers like 5Paisa before investing in a stock.

Avoid overtrading

Overtrading is the single biggest mistake of most traders. For example, you should only trade in the share bazaar when you see a trending market and when you are quite sure that the investment will not result in a loss. Avoid taking irrational decisions.

Maintain stop-loss

A stop-loss is the command placed on a stock that automatically triggers its sale when it goes below a predefined price. A stop-loss order is designed to limit loss. Novice traders sometimes have to give up trading due to huge losses incurred for lack of a stop-loss trigger. It has been noticed that maintaining appropriate stop-losses help minimize losses and maximize profits.

5Paisa is one of the best stock trading apps that provide you with valuable advice on all aspects of trading. It can also help you to choose the best stocks to buy so that you don’t suffer losses while trading online.

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Here’s How You Avoid Risks While Trading

18 May 2018

Trading in the stock markets can typically be summed up in two words -- ‘risk’ and ‘reward’. The general rule of thumb is that greater the potential reward, higher is the associated risk. However, this doesn’t hold true in the reverse order; high risk doesn't necessarily mean high rewards. This is why you need to evaluate your risk appetite before trading and also devise strategies to reduce unacceptable levels of risk.

Here are a few fundamental tips that will help you avoid risks while trading in the stock markets.

Diversification

‘Don’t put all your eggs in the same basket’ supports the concept of diversification. Portfolio diversification reduces your overall risk by spreading it over a variety of products. For example, you have invested 25% of your money in ABC shares, 25% in XYZ, and 50% in PQR shares. In this case, if XYZ shares tank, you will only face a loss on 25% of your investment; the profit from the remaining 75% percent will cover this loss. Your risk of loss is considerably lower with diversification than it is with investing your entire corpus in a single stock.

Monitor investments daily, reallocate assets when needed

To earn profits and avoid losses in the stock markets, you need to regularly monitor your investments and the market trend. This will let you know which investments are facing potential risk and you can sell them accordingly, thus circumventing losses. Allocation of financial assets among equity, debt, and alternative assets also helps lower risk while trading. Alternative assets consist of investments in currencies or commodities. For an investor with a moderate risk profile, typical allocation could be 50% equity, 30% debt, and 20% in alternative assets. Consulting a financial advisor like 5Paisa can also help you allocate your resources in a better way.

 

Research

Before trading in the share market, you should conduct a thorough research on your potential investments. Check out the stock's history, earnings, growth, management team, and debt load. Compare the results with other similar investment products and with other assets in your investment portfolio. You could also consider consulting brokers like 5Paisa before investing in a stock.

Avoid overtrading

Overtrading is the single biggest mistake of most traders. For example, you should only trade in the share bazaar when you see a trending market and when you are quite sure that the investment will not result in a loss. Avoid taking irrational decisions.

Maintain stop-loss

A stop-loss is the command placed on a stock that automatically triggers its sale when it goes below a predefined price. A stop-loss order is designed to limit loss. Novice traders sometimes have to give up trading due to huge losses incurred for lack of a stop-loss trigger. It has been noticed that maintaining appropriate stop-losses help minimize losses and maximize profits.

5Paisa is one of the best stock trading apps that provide you with valuable advice on all aspects of trading. It can also help you to choose the best stocks to buy so that you don’t suffer losses while trading online.