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Five Tips For Managing Trading Risks Wisely!

Efficient management of risks is extremely important for continued success in stock market investing. A lack of such expertise and failure to abide by the critical risk management principles can often lead to disappoint in terms of not just the returns but can have a potentially negative impact on your future investment behavior too. However, without risks there are no returns and a careful and articulated risk management strategy can help wonders for the investors. In fact, many a times, how an investor managers risks efficiently would help him race ahead. Here are five critical factors you should keep in mind to help mitigate risks wisely.

Remember that risk and return are two sides of same coin:Risk and return are the two sides of the same coin and a careful balance needs to be maintained between both.  It is important to keep strict stop loss on your trades and ensure that a loss does not affect your next trading decision. A sound blend of such discipline would definitely help you in managing your trades effectively. A measured approach to risk and returns and an unemotional and rational mind are key to long term success in investing.

Pay attention to key market information and news updates:While it is not expected for an average investor to be an expert in economics or finance, keeping abreast of the latest developments helps a lot. Typically, any website of a share broker online offers plenty of news updates and research reports to provide useful knowledge and information in this regard.This would help you understand the reasons behind major market movements and would also help in providing an idea about the trajectory of various stock prices.

Be clear about how much leverage your can take:Leverage is a double edged sword – potentially capable of bringing hefty gains though the losses can be equally steep as well. It is therefore, recommended that utmost care has to be taken while entering into derivatives trading: Derivatives are like futures and options are a margin based leveraged products. Please check the exposure taken by you and do not just focus on the margins. Check with you broker directly using the helpline number to get clarity in case if needed. Also, keep some extra funds to cater to MTM requirements owing to sudden and sharp price movements.

Invest in companies offering regular updates and information:This is one of the most simple and robust ways of managing trading risks. Try to invest in companies which you understand well. For this, focusing on quality stocks and professionally managed companies helps a lot. These companies normally have a strong business moat, well established brands and strong financial statements. A regular flow of updates about the company’s business environment, expansion plans and management talks are also a strong feature of such enterprises. This helps in understanding the reasons why the company’s stock price is going up or down.

Diversify your holdings across stocks and sectors:Avoid concentration at all costs. Never ever take a heavy position in just one or two stocks even if you feel that you are entering in the market at a very attractive valuation.  Maintain a sizeable number of scrips in your trading portfolio and also ensure that they belong to a wide array of sectors.

Summing Up
While there is no clear solution for completely avoiding risks and being successful in all your trades, above pointers can act as useful guidelines and would help you become an adept in the investing game over time. It is advised that you monitor the investments carefully and do not panic in times of volatility. Remember that you might have an account with the best online stock trading company but a potent mix of self discipline, awareness and sound risk management would be the key for managing your trades successfully.

Blog by : Dhruv Ajmera

Also Read: How mutual funds can help in successful financial planning
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