#6 How to minimize risk
As you are new to investing and getting ready to invest in the stock market then keep in mind that there is a large element of risk involved unless you reduce risks and exposure with care. A significant part of the risk comes from not knowing—the necessary knowledge of stock market, and the experience in investing. A lack of knowledge and experience constitutes the greatest risk for new investors but that can be managed toward gradual diminishing with a power that comes from extensive knowledge, and understanding. The more familiar you are with stock market-how it works, factors that affect stock value, materials you need to read every day , understanding thoroughly the balance sheet, the better you can navigate and shoot close to investment goals- that will only be direction of profit maximizing. The same knowledge that enables you to grow your wealth also enables you to minimize your risk.
Just think about for a second how a person in skydiving jumps out from an airplane over 3,000 feet high in the sky or a rock climber keeps his or her body hanging by fingers a hundred feet up a vertical cliff and pushing himself/herself to climb up much higher? How much risk is it for you? It must be close to risk of death. However, with enough experience, understanding of rock-climbing techniques and after a lot of training a person is able to build unconscious confidence, as a result skydiving or rock climbing is no longer risk rather fun games. Risk is related to knowledge, understanding, experience, and competence. Risk is contextual that is depending on the context.
Risk is an inherent part of investing in stocks. People always dream of making a fortune in the stock market, and many do it, but many other newbie investors have lost everything very quickly because of failing to minimize the risk involved with investing in the stock market.
Gaining knowledge is absolutely necessary before you do anything with your investment money, the foremost you can do is writing down lists of things on paper that such amount of time you are going to put aside for reading stock market articles, understanding the market system, browsing stock portfolio, reading market news. Then you create a few dummy portfolios just to watch and evaluate the shares you hold currently in the portfolios and also analyze them as a stock market analyst what has caused stocks gains or losses and these are results of what kind of investment strategy you have applied.
Pick a few stocks that you think will increase in value and then track them for a while probably 3 or 4 weeks and see how they perform; you can create multiple portfolios by using http://www.bdstock.com/portfolio.php page. Begin to understand how the price of stocks go up and down, and watch what happen to the stocks you chose when various events take place. As you find out more and more about stock investing, you get better and better at picking individual stocks. In this process- you haven’t risked or lost yet since you have not bought or sold stocks in real stock market rather holding them in your dummy portfolios. You can design a stock portfolio and track its performance with thousands of other investors to see how well you have been doing. If you can achieve overall 15% or higher percentage of profit gains in a three-four months of period which will be a remarkable achievement for a new investor due to current market trend which is up-beat and also DGEN/DSE indexes stand over 40% higher comparing to a 150 days moving average that is a sign of bullish market (in case, you want to verify it http://www.bdstock.com/marketcapitalization.php) that means market environment is on your favor and easier to make money than losing.
This entire topic here is to build a stock trading plan, strategies, trading objective, and involve in stock market education, and have enough experiences in order to reduce the risk and play as a master investor like George Soros/Warren Buffet. Have you seen an architect create a blue print who knows for sure a building will stand up for years, substance in the material and the infrastructure are so intact that will have strength to bear whole building? The quality of design and construction are measured perfectly while it is still on the paper as a blue print.
The bottom line is that you want to make sure that you are in control of your mind; you have learned enough, and gained experiences. Now, you are confident and able to analyze companies’ profiles, and follow the investment guidelines that you have created and experienced and detach your emotions from trading. If you are emotional with your losses or with your gains you are in for a roller coaster of a ride. You are either falling in love with stocks; hope shares will go up in the future without following investment guidelines.
Getting familiar with investing style:
Investing usually falls into one of two strategies: defensive and offensive. A defensive investing strategy looks to avoid stock market risk as it uses long term investing to post steady, consistent gains. Over time, defensive investing is the most likely to achieve its long-term objectives because it strict with investment guidelines to seek to virtually eliminate the risk in the stock market.
The second strategy is quite different. It is offensive in nature, looking to capitalize on opportunities in bull market. Offensive investing ignores or minimizes stock market risk as it looks to make rapid gains, mostly follow day to day market trend without following guidelines.
Defensive investing doesn’t mean you won’t make money; defensive investing means you take calculated risk and typically lower gains to consistently make money. We all know who won the race in a “Turtle & Rabbit Story” and completed the race at the end although rabbit is a faster runner; it was obviously the result of turtle’s stunning faith, perseverance which kept her running same pace in the race. The consistent gaining even a little bit of accumulation in a long period of time can bring greater success and suppress the faster gaining in a short period of time.
There are many investing styles. Some people invest aggressively, preferring riskier stock that might give a larger and quicker reward which is very close to offensive investment, while others invest more conservatively. Conservative Investing focuses on preserving the investment and allowing it to grow naturally over time. Conservative approach is the style for people who seek to minimize the risks using considerable fundamental analysis, usually investors prefer to invest in safe, well established companies’ stocks those companies have been around in the market for more than a few years with reputation, have shown increasing sales, increasing earnings per share over the years, have shown strong management skills by making new business deals, maintaining regular AGM and allocating constant dividend payments to investors. Conservative approach is a role that investors seed for long-term objective, are not playing the market for a quick buck rather traders focus on minimizing the risk by analyzing if these companies are seen as leader, playing a solid role as brand name and obviously these type of companies are not going anywhere because they are pillar of Bangladesh’s economy.
You may be thinking why I would spend so much time and effort understanding the process of analyzing shares and reducing risks when I can buy stocks with the help of other people suggestions, recommendations? No one would doubt about it, and neither do I, however, you will find different suggestions from different people and most of times they have no clue and are not expert on analyzing shares because they are new as much as you are in the stock market. Even you may make good money in a short period of time using those rumors, individual stock recommendation. But greater experiences come from failing a few times, but still striving to learn every aspect of investment methodology because a person knows I rather get experienced and expert on how to catch fish forever rest of my life rather given me big fish a few times.