How To Invest in The Stock Market in a Safer Way & Minimize The Risk of Loss?
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The risk itself is not bad, it is not an obstacle, but only an aspect that an investor must accept and assume if he wants to trade on the financial markets. However, a crucial thing for an investor when it comes to making investments as safe as possible is his propensity to take risks. You need to understand what kind of risk you are willing to take when investing your money and how to increase your investment security. Because everyone is different, there will be different approaches to gain and loss. Below are the most effective risk management techniques when looking for the safest investment possible.
An investor will not have emotional or psychological problems at a loss of 30-50% of his account balance while another investor may be horrified to see his account balance reduced by 5-10%. That said, you need to determine your tolerance for different types of risk. Any investment involves a certain degree of risk. Understanding the type of risk or a combination of types of risk is crucial to limiting it and, consequently, to investing safely.
The most important thing to feel comfortable when making investment decisions is, above all, that you need to invest as much as you can afford to lose. In other words, you should only invest money that is not needed to pay off current debts.
You also need to be aware of the many asset classes you can choose from. You can invest in stocks, commodities, currencies, ETFs, cryptocurrencies. Asset classes are also divided into the safest, ie least volatile, and the most risky, ie most volatile.
For example, Coca Cola shares seem to create much more consistent trends than Tesla shares. USD / CHF or EUR / GBP exchange rates may be less volatile than GBP / JPY or EUR / JPY exchange rates. And the volatility of a certain market can tell you immediately which of them can be safer or less risky and vice versa.
The higher the profit, the higher the risk
Many investors, who would like their capital to grow on the one hand but do not want to see substantial losses in their trading accounts, may ask themselves this question. However, the following saying applies to financial markets - "you don't risk, you don't win". In theory, the higher the expected potential profit, the symmetrical the risk.
If an investor expects returns of several hundred percent, as is now the case in the cryptocurrency market, he must be aware that this market may fall by several tens of percent in a short time. If the investor expects a rate of return of a few percent, he must recognize that, in theory, the risk of such an investment can lead to a decline of 10-15%.
Choosing an experienced broker is extremely important for investment security, whether you are a beginning trader or an experienced trader. For example, with more than 15 years of experience, XTB is one of the largest listed FX and CFD brokers in the world. It has branches in over 13 countries in Europe, Latin America and Asia and has over 5,400 financial instruments including stocks, CFDs, Forex, Indices, Commodities, ETFs and more.
Trading in financial markets is an activity that is largely based on probability. Therefore, you should not aim to have as many profitable trades as possible, but rather to make as much profit as possible when the market moves in your favor - and to lose as little as possible when the market moves to your detriment. .
Diversification by capitalization
Diversification means nothing more than making sure that "you don't put all your eggs in one basket", because if this basket falls, all the eggs will break. One method of diversification depends on market capitalization. Market capitalization refers to the total value of all publicly traded shares of a particular company. This is the method of determining the size of the company.
In general, large capitalization means large corporations, and low capitalization means considerably smaller companies both in terms of profits and number of employees. Large-cap companies also have more stable share prices, which are distinguished by both slower growth and lower risk of price collapses.
Smaller companies have more room for development and can quickly increase their value. But I can go bankrupt just as quickly. For example, the S&P 500 is an index that represents the largest 500 companies in the United States, while Russell 2000 represents 2,000 US companies with lower capitalization. In this case, an investor can choose the desired companies using the stock filtering tool that is available in the xStation platform, from XTB.
Regional diversification
The possibility to diversify investments through instruments from different countries / regions of the world is another form of diversification. For example, instead of owning only American companies, you can compose your portfolio with shares of companies based in the United States, Great Britain or Germany.
An investor can also apply diversification according to stock indices. In addition to US or European indices, XTB provides access to CFDs on stock indices in Asia or South America.
Similarly, in the case of different stocks and sizes of companies, the risk and potential gain can be balanced by distributing money to financial instruments in many regions of the world. In general, the less developed the economies and regions in which you invest, the higher the growth potential and the risk of loss. Thus, an investor can consider a portfolio based on, for example, 50% on developed markets and 50% on developing markets.
Sectoral diversification
Just as some regions offer potentially faster growth or decline, some sectors have a higher tendency to risk and return than others.
For example, the technology sector frequently sees spectacular growth. It also happened to suffer disastrous collapses. A good example in this case is the explosion of the dot-com bubble and a 78% decrease in the Nasdaq technology index in the years 2000-2002.
Other sectors may be much more stable. In this case, the actions of public utility or consumer goods companies should be taken into account.
Diversification by capitalization or by region may not be very useful if we have companies in a single sector. Thus, it is worth thinking about this aspect as well.
Insure yourself in case of crisis
You can add gold ETFs or CFDs to your investment portfolio. These tools usually grow when a crisis affects the economy. Therefore, in addition to the described methods of diversification, diversification between markets is also worth considering. You can also easily change the size of the exposure in individual markets.
In emergencies, you can reduce your equity exposure and increase your bond or gold exposure, and in the event of an economic boom, you can combine the components of the reverse portfolio. In addition, it is always worth having money ready to be able to buy a certain instrument at a crisis price.
One of the core investment portfolios includes, for example, 25% exposure to the stock market, for example through ETFs on the S&P 500, 25% exposure to the bond market, 25% exposure to the gold market and 25% held in cash. This is a theoretical example, but in practice it can help increase the security of investments in the markets.
In short, can you invest safely, without risk, on the stock market? The answer would be - you don't risk, you don't win. BUT this risk can be controlled, estimated and adjusted to some extent to changing market conditions. In this way, you can make investments more balanced, diversified and, consequently, independent of a single factor, which means that the risk can be distributed more evenly. XTB offers a wide range of financial instruments that can be adjusted to virtually any risk profile chosen by the investor.
Having several categories of tools available just a few clicks away is a very important thing for a successful trading strategy. Whether we are talking about Stocks, ETFs, holdings or derivatives instruments, CFDs, Forex instruments, it is important to be able to access them all in the same platform and their range to be as wide as possible on markets, industries, areas. in such a way as to allow a healthy diversification of the portfolio and an adequate risk management.
Trading psychology
Successful professional investors know that their biggest enemy is their own mind. Emotions of fear and greed are stronger than any forces that move markets when it comes to generating losses. A trader's past unresolved issues may recur when he is bored, scared, worried, or thinking about anything that might subconsciously remind him of these unforgettable events. Emotion control and stress management are fundamental in this area.
Trading psychology is recognized as a major issue in maintaining a career in trading or investing.