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The stock market is never a sure thing. However, there are a number of resources and strategies that enable investors to limit risk without comprising returns. I will highlight our favorite steps to invest in stock market with limited risk.
7 Steps to Invest in Stock Market with Limited Risk
A long-term secured investment is one of the best ways to generate wealth and keep it stable. On the other hand, investing in stocks has always been touted as a getaway to quick money. In addition, any long-tailed bull markets make you wonder how you can limit your risk and avoid a downside collapse in your portfolio. You need to be able to limit risk whether you are investing for passive income or not.
However, investing in the stock market is not easy and requires lot of research and knowledge about the market and the on-going trends. Stock market trading involves several risks as there are no guaranteed returns and there is a good chance of losing your investment.
An investor who has been holding stocks for a longer period of time has a greater possibility of receiving handsome returns. Even if the stock is performing badly for a shorter period of time, it is advised to still hold the stock as it will eventually draw in returns.
We have been building a diversified dividend stock portfolio through Robinhood. You can follow along with our progress by following our Dividend Income Portfolio tag. We plan to show you that anyone can build a portfolio of both dividend income and long-term capital appreciation.
Robinhood offers commission-free trading for options and stocks. Every single stock. If you join with us, we will both earn a free share of stock! You can invest any sum of money. If you are new to Robinhood, our Robinhood dividends guide will provide you all the insight you need to know.
7 Steps to Limit Risk in the Stock Market
There are several parameters an investor has to look out for before investing in stock market. Here are few steps that will help you invest in the stock market without worrying too much about the risks. Consider these financial planning quotes to keep you motivated about your financial future.
1. Research and understand the stock market
First and foremost, it is important to research and gain some decent knowledge about the market. This will help you immensely in a lot of ways. As business and economic cycle change quite frequently, one must understand when to invest and when not to.
One of the favorable times to invest in the market is when the economy is in a boom cycle and when the market sees a short-term fall. To keep yourself updated with the ever-changing market trends, you can keep a track of the current affairs in the world of stocks. You can also gather information about the company’s performance that you are interested in.
Did you know that there are brokerages that will simply give you free stock just for signing up? That’s a great no-risk way to start investing.
You must arm yourself with the best tools possible. Consider these forex trading books to learn how to get started.
2. Beware of the herd mentality
It is extremely important to not follow the herd mentality. This essentially means, if a lot of people are putting their money in one stock, avoid following them and investing in the same stock. This is one of the most hard to determined ways to limit risk in the stock market.
It is important to evaluate the current market trends before investing and hence, avoid joining the herd and make an investment blindly without doing any research. It is highly advised to stop imitating investment decisions especially in case of stocks.
3. Diversify your investment portfolio
This is one (if not the most important) ways to invest in stock market with limited risk. It is important to diversify the portfolio broadly while investing in various stocks and assets. Avoid putting all your money into a single stock, as the risk heightens if it does not perform well. You can minimize the risk associated with stock trading by investing in a diverse stock portfolio. At the same time, make sure you have not gone overboard by investing in a number of stocks as it may not give you significant returns.
You can evaluate your diversification by signing up for Personal Capital. I love linking all of my accounts and they will automatically tell you if you are diversified or not by looking at your investment allocations. Work smarter not harder.
4. Keep emotions at bay
You should have a good control on your emotions while trading in stocks. Also, you should have risk-taking abilities. In addition to this, you should refrain from being greedy and scared while making an investment-related decision. In addition, there are some investors who get emotionally attached to a stock and are biased towards it.
This can prove to be financially dangerous at times when the stock is not performing well. They either invest in it or are not able to exit it at the right time as they are emotionally attached to the stock. Hence, it is advised to always think rationally while investing in stocks and keep emotions at bay. Stock market volatility happens. Make sure you are positioned to withstand swings in the stock market.
5. Invest only excess funds
There can be situations where you earn some extra money. Investing the extra takeaway in funds can be a good option. However, you must understand that a stock market is volatile in nature meaning – the rise and fall of the prices are unpredictable.
You can either gain from the stock or get no return from it. Hence, it is advised to invest the excess funds that you can afford to lose. As investing in stock market is full of risks, it is safe to use the surplus fund and keep the required investment safe. Also, make sure to not invest your emergency fund in the stock market.
Continue to reinvest through fractional shares, which will help you accelerate your dollar cost averaging.
6. Look out for stock fundamentals… the numbers don’t lie
I love fundamental analysis. I always believe the numbers don’t’ lie, which is why I’m a big fan of financial ratio analysis to evaluate an investment. It must be noted that a stock is actually a company. So, when you invest in a stock you are investing in the company and therefore, you need to look out for the fundamentals of the company.
An investor should do a thorough research on the company before investing in it. Just following the price trend and history of the share is not enough as you need to understand and consider the future growth and potential of the company. This will give you a better chance of gaining from your stock investments.
I’ve built a fantastic guide on how to find undervalued dividend growth stocks using FINVIZ and FINVIZ futures.
7. Portfolio evaluation is important
Finally, it is important to evaluate your portfolio regularly. This will help you make important adjustments to your investment. The stocks which are not performing well or are not giving any returns should be sold.
This will give you some additional money that can be used for either investing again in stocks or other investment opportunities. Find where risk makes most sense. Tony Montana (from Scarface) had way too much risk and here are 7 money management tips I learned from his wrongdoing.
Investing in stocks gives investors an opportunity to build assets in the longer run. This acts as a good investment option and can help one reap benefits for a long time, of course, only when invested mindfully. One should follow a disciplined investment approach, run a thorough research using reliable sources (online as well as offline), and also have realistic expectations about these investments.
If you want automated investing, this is a great way to limit risk and not invest in risky stocks. Try using Wealthsimple for automated investing. You can rest easy at night knowing that your money is in good hands.
Conclusion on How to Invest in Stock Market with Limited Risk
Investors who have a dedicated investment plan and discipline in monitoring the portfolio have been able to generate great returns. However, an investor should be careful as stock markets can be tricky and there is a possibility that you will lose your hard-earned money due to a poor judgement or lack of research.
He/she will gradually understand the nitty-gritty of the stock market and get a better idea of how to improve earnings with the changing dynamics. Ideally, an investor should come up with his/her own strategy on investing in stocks and rework on it as per the market conditions. There is ample amount of literature available on the websites like the Nifty 50 about various kinds of stocks. Going through them can help the investor a great deal. You can invest in stock market with limited risk.
If you are a millennial, you may want to consider finding a financial planner for millennials to ensure you are invested in the stock market the proper way. Once you’ve had a proper financial checkup, you can consider if you are financially astute and on your way to financial freedom.
Ready to build a dividend portfolio? You now know how to invest in stock market with limited risk.
How do you invest in stock market with limited risk? Let us know in the comments below. We’d love to hear from you!
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