Tips on mitigating risk factor in stock trading

Tips on mitigating risk factor in stock trading
Courtesy: Witthaya Prasongsin | Moment via Getty Images

The stock market is the only financial instrument in the world where millions can be made by investing in hundreds and it's also the only financial instrument where millions can be lost.

Therefore, it's very important to take precautions while investing or trading in the stock market, especially as a beginner, as beginners are extremely prone to mistakes. The way to avoid huge losses in the stock market is to first make your foundation of knowledge sturdy by getting familiar with the basics of everything there is to know about stock markets.

There is immense free material available online on sites like Top10StockBroker, YouTube, Google, Quoraetc to help you through your journey of stock markets. Now, there is no hard and fast rule to how one gets ready to invest in the stock markets since every individual has its method which works for them. But there are some precautions that every investor or trader must take, whether professional or novice while investing in the stock markets.

And this article covers some of those important factors which will help you in mitigating risk.

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Selection of Stock Brokers

While most people don't give any importance while selecting a broker, but you should. A good broker is a must for a worry-free and smooth investing experience.

Deal only with market intermediaries who are registered with regulations such as India’s SEBI or stock exchanges.

While selecting a broker, the important things are a decent goodwill value, favourable transaction charges, user-friendly UI design of their platforms, and a good customer support service.

Risk and Return Factor

Risk and return are directly proportional to each other in the stock market. All stock market investments carry some risk.

The return on stock market investments is not guaranteed, be cautious about stocks with high prices and high risks. Always remember, let your profits run long and cut your losses as soon as possible.

Basics of Stock Market

You must know how the stock market works, learn basic terminology (order types, bull market, bear market, Entry/Exit loads, stock symbol), learn to read financial statements, balance sheets, and meaning of important ratios (debt to equity, book value, market capital, etc.)

Before starting to invest in stock markets, an individual must have to make a clear-cut Investment objective. An investment objective is a plan you make for yourself and for your family about the things you may need or want in the short term, long term, and at the time of retirement.

Most importantly, never invest all your savings in the stock market as they are subject to market risk, go for safe investments like FD, PF, Insurance Policy, Mutual fund, govt bond NHAI, etc. They are much safer and will act as a hedge in the bear markets.

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Don't ignore the Expenses

As you pay brokerage and securities transaction tax on sale/purchase, capital gain tax in case of profits, you need to select a stockbroking firm as per your investment objective.

If you want to invest for the long term, a full-service broker would be good for you, as they provide many additional services which would be helpful for long-term investors and discount brokers are good for intraday trading as their transactions rates are very low.

Control your Emotions

Don't make hasty decisions based on the over-optimistic speech of companies, Irrelevant news, rumours, and pick stock through herd mentality. Think wisely and make a logical decision based on facts.

Never Predict the Market

A smart investor stays away from speculation and makes investment decisions based on statistical data and fundamental facts about the company.

Most novice investors try to make a profit by thinking that they can predict the market, that they can buy low and sell high without going through the effort of researching the company or financial statements, etc.

In Trading or Investing, this thought process never works for long term, you may get success 10 per cent of the time but you will surely fail for 90 per cent of your trading journey.

Technical Analysis and Fundamental Analysis are critical for success in stock market.

If you know that a particular company has strong financials and are fundamentally powerful, then you can definitely think of buying their stocks in dips for long term, as you know this company will grow over a period of time.

You should never believe in tips from YouTubers or social media Influencers, always go with people who have 10-15 years of experience into this industry.

Again, it is very important not to believe blindly anyone, take tips and do your own research and then only go for investment when you are convinced of the tip.

(ANI/ATK)

*Please Note: Past performance is not a guarantee of future performance. All investments can fall as well as rise in value and you can lose some or all of your money. Additionally, this podcast does not constitute an investment recommendation.

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