Investing is an activity that includes risk regardless of what anyone tells you. However, when it comes to stock trading, there is much you can do to manage that risk.
Generally speaking, the riskier the investment, the bigger the reward or return. There are some investments or trades whose rewards don’t warrant the risk.
When investing, you invest in stocks, you want to get the biggest return with the lowest risk possible. There are many investment strategies that involve various levels of risk and it is up to you to accept or refuse the risk.
Being a conservative investor or risk-averse is a winning strategy for most especially beginners. The following is how you can start stock trading with minimal risk:
Warren Buffet has a popular saying which is ‘risk comes from not knowing what you are doing.’ The number one way for you to start stock trading with minimal risk is to know what you are doing.
Therefore, you should learn as much as you can about investing in the stock market. If you can get the lay of the land, then you can know exactly where to go, so to speak.
There are many resources you can use especially online to educate yourself on every aspect of stock market investing or trading. Read books, blogs, and other financial literature to increase your knowledge.
Watch videos and listen to experts on stock market investing. You will soon learn how to trade in the stock market while reducing your risk.
If you don’t understand an investment, you should not make it because it is too risky.
02. Don’t Beat the Market
When you start trading in the stock market, there is an inclination to try and beat the market. Unfortunately, it is one of the riskiest things that you can do.
In the beginning, it is vital that you simply participate in the market. The reason is that almost every investor who tries to beat the market usually ends up underperforming it. Trying to time the market almost never works. We live in an age of instant gratification where most people want instant results. If you want to invest with low risk in the stock market, you should aim for progressive returns over time. You should learn how to analyze the fundamentals of every investment so that you don’t have to time the market.
The recommended action is to invest in a portfolio of diversified stocks which will reduce the chances of the entire batch underperforming. Cost averaging which is investing a portion of your income every month is another way to go.
Only a minuscule fraction of the market overperforms it in the long run.
03. Investment Apps
There are many tools that can help you at the start of your stock investment journey. One of those tools is the investment apps that are designed to make investment as easy as possible.
There are many varieties of these investment applications. The professionals behind this Stash Invest Review stress that you should evaluate the features of any app before committing to buying and using it. Investment apps can either be automatic or manual. There are those that can manage your portfolio for you while there are others that require you to actively manage your portfolio.
Investment apps will significantly reduce the risk of investing in several ways. One is that they charge very low fees hence you will be risking less money. They are also fantastic tools for beginners to learn about stock trading which reduces risk.
04. Index Funds
Investing in a single stock is the riskiest way to go. Investing in a diversified portfolio substantially reduces the level of risk and it does not get more diversified than an index fund.
A market index is a collection of stock that is representative of a particular part of the market. For example, the S&P 500 is a collection of the largest 500 companies in the stock market. There are other market indexes in various stock markets.
An index fund is a fund made up of the stocks in an index. By buying a stake in the index fund, you are essentially investing in all the stocks included in the fund. Therefore, the risk is significantly reduced which is great for a beginner.
The be*st way to think of an index fund is as a mutual fund without the manager. In fact, many index funds outperform the vast majority of mutual fund managers.
You can also reduce risk while stock trading by buying into an Exchange Traded Fund (EFT). An EFT is just like an index fund with the main difference being that they are traded like another asset.
Both index funds and EFTs offer a passive approach to investment which substantially reduces the risk. Moreover, you are charged low fees which further reduces risks, especially when compared to a human fund manager. It is a great approach for a beginner.
05. Investment Simulators
If you want to invest in the stock market with absolutely no risk, then you should use an investment simulator. In some cases, they may be referred to as demo or virtual trading accounts.
Investment simulators mimic the actions and processes of a real-life stock trading account. The difference is that you risk fake money instead of real money hence zero risks.
You will be awarded starting capital by the simulator which is all fake. However, the data portrayed and used in the simulator will be the same as if you were investing the money for real.
Therefore, you get to observe and learn the real-life effects of your actions in the stock market without having to actually risk any money. You can hence improve your skill and knowledge.
By the time you risk real money in a real trading account, you will be a much better investor. You will have the confidence, knowledge, and skill of a real investor hence less risk.
There is much that goes into stock trading. There is an opportunity for big returns as well as large losses. Risk is inherent in every investment but using the above tips, you can significantly reduce your risk. The best way to reduce risk in the stock market is to follow Warren Buffett’s advice; know what you are doing.