Top 5 Ways to Reduce Risks in Stock Market Investing


blue-chip-company

As scary as it may seem, stock market investing is associated with high risks. This should never scare you. Like I said in my other post, you don't need to be Warren Buffett to invest in stock market. In fact you can start investing and open an account with COLFinancial right now. Make sure to read my other post on stock market introduction.

There are 5 ways you can do to ensure a fail-proof investment in the stock market.


Invest in Blue Chip Companies

Only invest in “blue chip” companies. These are companies which are in good standing in terms of profitability, years of existence and credibility.

These are companies which you expect to be still operating after 10 years. So how do you assess if it’s a blue chip Company?


Simple. Google the company and visit their site. See their financial reports and company profile. There you can assess if the company is growing strong or not.

You can also check the company through observation. Questions like, how big is the company and its subsidiaries (if any), how visible it is to public and their competition. Most likely, blue chip companies are dominating the industry that that they are involved in. They are market leaders.



Diversification

As the old cliché goes, “Don’t put all your eggs in one basket.” Why? Because if the fox steals it, none would be left. In stock market, learn to invest in every industry.

As a rule of thumb, you should invest in a portfolio composed of financial, conglomerates, oil & mining, food, real estate and retail. The rationale behind this is risk distribution. When one industry fails, other industries are growing hence your loss is mitigated.


No matter what the scenario is, you should continue buying stocks and not sell it unless you need emergency funds. When you buy stocks for a longer duration of time, you are building an empire little by little and that is rewarding in the end seeing the results!


Cost-Averaging Method

Invest in small, frequent amount. In this manner risk is evenly distributed per period and not in lump sum. The idea behind this is that, if you continuously buy stocks, the future market price is still way higher than the average price of the stocks.

As an example, say you bought Apple stocks 4 years ago at $750 a share. The following year, you bought it at $740. On the next year you bought it at $762, then $780.

Let's say the market price today is $780. If you take the average price of your stock, that would be $758. Hence, your stocks has appreciated by $22 a share!


For four years, you bought Apple stocks at an amazing price of $758. Since the current market price is $780, you gained $22 per share. Sounds great, doesn't it? Imagine if you have a hundred shares of Apple stocks. That would be $2,200 profit!



Glance In A While

While you can leave your stocks behind, perhaps it is better to monitor once a week and see how the market goes. You cannot afford to lose simply because of lack of supervision.

You wouldn't know when bear markets happen and when your stocks are losing value so it is best to check regularly and take action before it gets worse. On the other extreme, it is not advisable to check your stocks every minute or so.



Conclusion

While stock market investing is risky, there are specific tactics to mitigate risks. If we embrace and manage fear in a different way, it could work to our advantage.

How about you, how do you manage risks in the stock market?

3 comments:

  1. Investing is like driving a supercar. Yes it's pretty damn fast! But you can drive it slow :)

    ReplyDelete
    Replies
    1. and drive smart by enjoying the journey instead of finding a shortcut. ^^

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    2. Agree, tradersnotes.. stock market investing takes patience to build your portfolio. Either you want to get profit quick (and lose) or invest in the long haul and be profitable

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