Investing in the stock market has always offered better returns on your savings compared to a traditional savings account. However, do to some of the risks, many feel that it isn’t worth the risk. Thankfully, with a bit of practice — and some stock trading best practices — you can reduce the risks associated with trading.
Plan Your Trades
When you’re first looking into how to make money from trading stocks, many use the old adage of buy low and sell high. While this is the foundation of a key strategy, it doesn’t give you the tools you need to trade successfully once you have purchased the stock. How low is low enough to buy? How high is high enough to sell?
Before buying any stock, determine what your stop-loss and take-profit range will be. Stop-loss refers to when the stock drops to a predetermined price where you sell below the buying price. This will prevent you from making the mistake of holding onto a failing stock for too long in the hopes that it willbounce back. The take-profit value will be the point where you sell the stock for a profit when it reaches a predetermined amount above your purchase price. Planning these two values before you make a trade go a long way in mitigating risk and maximizing your return.
Diversify Your Portfolio
If you’re looking to be a successful long-term investor, diversity is key to a steady growth. If you invest in only insect-repellent brands, for example, you would likely see little-to-no growth during the winter, or even a small loss during the quarter. Mixing your investments between different niche markets and high- and low-risk stocks has a proven track record of steady growth. Doing so will also reduce the risk of losing a significant amount of your portfolio should one of your investment areas see a steep decline. Simply put, don’t put all your eggs in one basket.
Reinvest Appropriately
Another way to reduce trading risk is to make sure you reinvest your successful trades appropriately. Let’s assume you made a great trade and were able to earn a few thousand dollars in profit after selling the stock. Spending these profits frivolously increases the risk of your investments. In essence, you are spending the money earned by successful trades, and taking losses on the unsuccessful ones for an overall net loss. Instead, look to reinvest a healthy portion of your successful investments into various savings accounts and more stocks.
Reducing trading risks is the first step to becoming a more successful trader overall. Planning your trades and creating a stop-loss take-profit range for your trades is an excellent approach for traders of all experience levels. Having a diverse portfolio will further reduce the risk of significant loss. A little celebration after a big win is expected, of course, but remember the reason you are trading in the first place. Reinvesting your profits will lead to more substantial returns in the future, even if you only put that money into a CD or customary savings account.
Photo Credit: kenteegardin
Years ago you had to use a brokerage firm, which cost you money and you didnt always get good advice. Ive done better on my own!
Me too, John. Me too.