| Risk in the stock market is everywhere. Investing in | | | | market, or any segment of the market. When using |
| the stock market is fraught with worry, for good | | | | ETFs, be sure there is sufficient liquidity (plenty of |
| reason. If you lose half of your investment, you | | | | shares trading) or you will create another unwanted |
| must double your return to just breakeven. Warren | | | | risk. |
| Buffett, considered by many to be the world’s | | | | Many investors size their stock position based on |
| greatest investor, states his first rule of investing is | | | | their tolerance for risk. Dr. Van K. Tharp performed |
| “do not lose money.” Unfortunately, the risk | | | | an experiment on position sizing in his book Trade |
| in the stock market of losing your money is always a | | | | Your Way to Financial Freedom . As Dr, Tharp found |
| possibility. However, without taking some risk there is | | | | adjusting the size of your stock position using |
| no reward. Therefore, successful investors employ | | | | percent risk or volatility greatly increases your |
| stock market risk management strategies to minimize | | | | returns. By adjusting the size of your position based |
| their losses. Managing risk in stock market starts with | | | | on the risk you are willing to assume, you lower your |
| identifying the type of risk and taking action to | | | | potential of a loss and increase your probability of |
| mitigate the impact of the risk on your investment | | | | solid gains. Our article on Position Sizing provides |
| portfolio. | | | | further detail on this method to manage stock |
| Risk in the stock market comes in many forms and | | | | ownership risk. |
| each can lead to a loss. The most common is the | | | | Should the price of your stock turn down, |
| overall trend of the market. Approximately 60 % of | | | | wouldn’t it be nice if you could exit your position |
| the move of an individual stock is attributed to the | | | | before the price fell further. Stop loss or trailing stops |
| trend of the stock market. If the stock market is | | | | are tools used by many investors to close their |
| rising, it takes with it most of the other stocks, | | | | position should the price fall by a specified amount. |
| though not in equal amounts. When the stock market | | | | Most brokerage firms allow the use of stops using a |
| falls stocks sink with it. | | | | set number of points below the price or a percent |
| Another big risk in stock market lies with owning an | | | | below the price. Trailing stops follow the price up by |
| individual stock. While owning the stock of a | | | | an amount you set and then hold that price level on |
| company can offer greater rewards, it also entails | | | | any turn down. The idea of this stock market risk |
| the risk that something might go wrong that can cut | | | | management technique is to leave enough room for |
| the price of the company’s shares in half. It | | | | the stock price to fluctuate within its up trend, but |
| might be news that sales have suddenly fallen due to | | | | be ready to sell should it fall below a pre-determined |
| a new competitor, or a product liability issue has | | | | level. Some investors use mental stops, which work |
| arisen. For whatever the reason, individual stocks are | | | | well as long as they have the self-discipline to sell |
| subject to risk associated to them alone. | | | | when their stop price is hit. |
| While there are other risks in the stock market, | | | | Many people believe equity options are risky |
| these encompass the vast majority of the ones you | | | | investments. It is true that options can be risky as |
| will encounter. Fortunately, investors can employ | | | | they increase your use of leverage. However, |
| several strategies as a part of their stock market | | | | professional investors use certain options to reduce |
| risk management program. | | | | the risk of their portfolios. Covered call options are an |
| First, they can invest with the trend of the market. | | | | excellent way to create some down side protection |
| Following the trend is a proven method, though it is | | | | while increasing the potential return of your portfolio. |
| not as easy as it sounds. Trend following tries to | | | | Covered calls are suitable for IRA accounts, indicating |
| identify and then align with the underlying trend of | | | | that the authorities consider them a low risk |
| the market. The assumption is the market will be in a | | | | investment strategy. Protective put options are |
| trend that could last a day, a week, a month a year | | | | another method to lower risk of a portfolio. Similar to |
| or multiple years. Generally, short-term trends cycle | | | | insurance, protective puts provide security should |
| within longer term trends. Depending on your time | | | | your long positions suddenly fall in price. When that |
| frame, you can align your stock position with the | | | | happens the put option guarantees you will receive |
| trend once you have identified it. When you follow | | | | the agreed upon price for your stock no matter how |
| the trend, you are able to reduce the likelihood your | | | | far it falls. You can learn more by reading articles on |
| stock will fall when the market trend is rising. | | | | covered calls and protective puts that describe the |
| Another proven risk management strategy for | | | | features and benefits of these stock market risk |
| owning stocks is to diversify your portfolio across | | | | management strategies. |
| several different companies, sectors, and asset | | | | Managing risk in stock market is a matter of doing all |
| classes. By owning several different stocks, you | | | | you can to avoid losing money. Fortunately, there are |
| reduce the impact of a loss in any one company. | | | | several strategies to help you to achieve this |
| Moreover, if the stocks you own are from several | | | | important goal. The most successful investors employ |
| different industry sectors you mitigate the impact of | | | | all of stock market risk management strategies that |
| any one sector have causing a loss. Exchange Traded | | | | recognize how important it is to avoid making a |
| Funds (ETFs) offer an excellent way to add diversity | | | | mistake while investing in the stock market. Do your |
| to your portfolio as they hold shares of companies | | | | portfolio a favor and use the available stock market |
| based on an index. The index can be for the whole | | | | risk management techniques to your advantage. |