7 ways to minimize risk in Stock Market for Beginners
Many investors start their investment journey in Stock Market with full confidence that they will generate good returns and they do everything to increase returns on their investments. They invest time in research, do analysis, choose quality stocks, make strategies and many more things. Most of their time and energy go in increasing returns but in this race of chasing higher returns they neglect one most important parameter which is RISK Management. There are 2 types risk in Stock market- First is Uncontrollable risk- The risk which can’t be controlled like Pandemic, Wars, Earthquakes, Political crisis etc. but good thing is that it does not last for longer time, it impact get nullify by itself. So, you actually don’t have to manage it. Second is Controllable risk- This is in your control and you can manage it so that you can continue your investment journey and also increase your capital. There are 7 ways with which you can minimise this risk and if you follow these ways your capital will never get erode in long run, so let’s understand these ways in detail-
- Know your Risk appetite: Whenever you start your investments in stock market or any investment for that matter, you must know your Risk appetite. Risk appetite varies from person to person. If you are in 20s and you don’t have any financially dependents then your risk appetite would be more but if you retired person in your 60s your risk appetite would be very less compared to previous case. Moreover, risk appetite does not only depend on age and dependents, it also depends on your psychology of investments. If stock market day-in-day-out volatility bothers you then it is not in your risk profile while if you are aware that ups and downs are part of stock market then it is in your risk profile. So you need to first evaluate you Risk appetite, it will give you an idea for which category of stocks you should pick for your investments.
- Industry and stock diversification: Investing in one or two single stocks or completely rely on stocks from one industry is no way different from playing in Casino. The stocks you pick should come from different industries. It is very common practice that people use to invest in industry which is talk of the town; they invest all their money in stocks related to that industry. For example- currently EV (Electric Vehicles) sector is in trend so they invest all money in EV stocks or few years back when COVID pandemic was on peak at that time pharma industry was making headlines so they invest in stocks only from pharma industries. This practice is very risky, you should pick industry which is going to boom but pick at least 4-5 such industries and diversify your investment in 20-30 stocks. It will reduce the risk and return will be intact if stock picking process is correct.
- Investing with complete research: There should be a basic practice before investing in any stock that investor should research thoroughly and invest only in fundamentally strong stocks. But unfortunately this practice is not so common, many investors invest in stocks which are making flashy headlines, stocks making new highs, day after quarterly results are announced and most common- any relative or some telegram channel/social media platform has recommended it. Never invest in this style, the chances of losing is very high. Even if you have taken paid services from any organisation for stocks recommendation, you should still do basic research in this case too. Taking recommendations or tips is not bad but rely completely on these tips is definitely going to harm your investments. Use your due diligence, take some time on research and follow correct investing process and you will see your risk will reduce like anything.
- Go for Long Term Investing: There is a very popular saying- “Stock Market is Casino in Short Term and Wealth generating instrument in Long Term”. When you invest in fundamentally strong stocks for long term by default you reduce your risk. Stock market has crashed many times but it has recovered with double pace. It is very common in stock market that when there is euphoria everyone is buying anything and when there is panic everyone is selling whatever they have. Long term investing nullifies all these effects. In every 20-25 years span there was and there will be many Ups and Downs due to all uncontrollable external forces but they get nullify in this same time. Going for long term investment you will not only reduce your risk but also increase the chances of wealth generation.
- Asset allocation and hedging: As we seen in second point that diversification in stocks is important but going for different diversified Asset allocation is one step ahead of this. Stock market is one investment, there is some time Bull Run and sometime it is Bearish. So if you invest in different assets like Real Estate, Bonds, Gold, Crypto, NFT etc. it will reduce your risk further. You can also invest in an asset which you think is going to rise because every time every asset is not going to rise. For example- Gold and Stock market has inverse relationship, you can invest in Gold when stock market is going down and vice versa. Similarly you can choose Asset for investment as per your strategy. But the important caution is that you always invest in an Asset which you understand. If you don’t understand Crypto, NFTs etc. avoid going for these investments.
- Cash is King: It is a popular saying and it had proved itself right many times in past. Whenever market crashed, most of the investors have only ONE regret- They don’t have cash to buy stocks at discounted price. Many investors know market has bottom out and it is the best time to invest but they don’t have liquidity and they lose the opportunity of making big profits. Maintain liquidity or keep a portion in cash in order to grab such opportunities. If we see stock market position in March 2020, Sensex crashed to 25000 levels and then it recovers and broke all records to become more than double at 61000 in merely 6 months of time. Those investors had cash or liquidity at that time had generated hefty returns out of it. So you should keep some liquidity to grab such opportunities.
- Keep track of your investments: It is said that- once you have invested in good stocks you don’t have to see it for years but it is not a good practice. You should track your investments time to time. You don’t have to track market every minute or every hour or daily but you should track it monthly or twice in a month and try to strategise your investments. You should review your strategy time to time and keep your investment portfolio updated to reduce its risk.
Conclusion: If an investor does not do Risk management while investing in Stock market, his/her investments will by default rely on Luck and a good investor never rely on Luck. Hence Risk Management is equally important as increasing returns on your investments. Risk management will reduce your chances of Capital erosion and if you have capital, you will never be out of market. Happy Investing.
