Investing in the stock market can be a great way to build wealth over time. However, it also comes with risks; therefore, you should be careful where you invest. Stock prices fluctuate on a daily basis and can experience big drops & ups during market downturns.
While risk is inherent when it comes to investing, there are ways to manage it and invest smarter. In this article, let us learn about how to manage your stock market risk, what are tips to manage risk, and more. You can explore investing & trading tools from online demat apps. Here are some tips for managing risk in your stock market investments.
Basics of Stock Market
To start trading, you need to know about different accounts. A demat account, short for the dematerialized account, is used to hold financial securities like stocks, bonds, ETFs, etc. in electronic form. When you buy shares, they are credited to your demat account in your name. This eliminates the need for physical certificates. You can monitor the holdings in your demat account
The second important account for trading is the trading account, which is needed to actually buy and sell securities on a stock exchange. The trading account is linked to your demat account and allows you to place buy/sell orders for shares through a stockbroker.
The stocks you trade are received and settled in your linked demat account. Trading accounts can be of different types – like cash, margin, or derivatives – and allow trading in segments like cash, futures, options and more.
Tips to Manage Stock Market Risk
These tips will help you mitigate stock market risks:
1. Diversify Your Investments
One of the best ways to reduce risk is to diversify your portfolio across different types of investments. You should know that you shouldn’t put all your money into just one or two stocks. Spread it out across stocks in different market sectors, bonds, mutual funds, ETFs, and other types of financial securities. Diversification ensures that if one investment declines in value, others may hold steady or rise to offset the losses you are currently facing in the stock market.
2. Try to Aim for Long-Term Investing
Stock prices go up and down in the short-term trade, sometimes dramatically. But over longer periods of 10, 20, or 30 years, the market tends to rise. So, avoid obsessing over daily price swings. Instead of focusing on the long-term investment, you can start investing consistently over decades. The longer your investment time frame, the more time you have to ride out short-term volatility in the share market.
3. Invest in Strong Companies
Handpick different companies. Do thorough research before choosing stocks to invest in. Look for companies with solid fundamentals – strong management, finances, competitive advantages, and growth prospects. Established companies with a long history of weathering market downturns also tend to be safer investments. Weak, unstable companies are riskier and more prone to major losses.
4. Create Stop-Loss Orders
Place stop-loss orders on your stock trades to limit the potential downside on your trade. A stop-loss order automatically sells a stock if its price falls below a level you preset. It caps your maximum loss if the stock declines. For example, if you buy a stock at Rs. 100, you could set a stop loss at Rs.95 . If the stock falls to Rs. 95, then your order will automatically get executed in the share market.
5. Avoid Over leveraging
Buying stocks on margin means borrowing money from your brokerage to purchase more stock. While this can magnify your gains, it also dramatically amplifies your risk if the stock price falls. The borrowed money has to be repaid even if your stocks decline in value with respective interest rates. Avoid margin trading, which essentially amounts to gambling with borrowed money. The potential losses can far exceed your initial investment.
6. Manage Your Trading Account
As a trader, you are aware of what is trading account, Your trading account itself is a factor in your stock market risk exposure. Manage your account wisely to keep risk in check. You need to overview your holding every day or every week
Another thing a trader must do is to stay disciplined. Don’t panic and sell in a volatile market. Have a plan and investment strategy and stick to it. Trying to time the market often backfires, so accordingly manage your plan with online trading
In the stock market, there is always some level of risk. But by diversifying your portfolio, focusing on long-term durable stocks, placing protective stop losses, and managing your trading account prudently, you can invest with greater peace of mind. Paying close attention to risk management ultimately allows for safer investing.