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How to manage risks by investing in the stock markets?


The stock market seems intimidating to many as it is seen as speculative activity with no certainty of return. It is therefore widely misinterpreted for gambling or betting. The myths surrounding the stock market in India act as a catalyst creating fear of investing and trading.

Common misconceptions prevent potential investors / traders from learning and profiting from the stock market – whether you can only make money by investing huge shares, expert advice is a must, or a risk high means high efficiency.

However, this trend is being reversed.

According to data from the Securities and Exchange Board of India (SEBI), investors opened a record 7.2 million Demat accounts in Q12021. Often traders do not understand the importance of risk management, resulting in resistance to stock trading and investing. With the help of risk management techniques, you too can utilize the wealth creation potential of the market.

If you are thinking of investing in the stock market but are held back by market myths, this is for you.

Technical analysis

It is widely said that “history repeats itself.” Maintaining this belief, technical analysis studies the movement of the stock price and predicts its behavior. It presents a graphical representation of the price history, which makes it easy to capture market reactions.

The price and volume information will help you determine metrics like moving averages, relative strength index, Bollinger bands, etc. These technical indicators will familiarize you with the potential risks involved and you will be in a better position to minimize or even transform them. in profitable holding positions.

Diversification

One of the most important ways to manage risk is to diversify your portfolio. This means investing your money prudently and wisely in stocks with varying volatility and unrelated themes. When you divide funds with the expectation that the positive performance of some will outweigh the negative performance of others, you are minimizing the risk that a set of stocks poses to you.

The goal of diversification is to reduce risk. If you invest in things that are not moving in the same direction, simultaneously, or at the same rate, you potentially reduce your chances of losing all your money.

Risk / reward ratio

The risk-return ratio serves as a measure to compare the likely returns of a particular investment / transaction to the amount of risk an investor takes to achieve those returns. To assess the ratio, you need to divide the risk – the amount the investor will lose – if the price moves negatively by the reward – the investor’s profit when the position is closed. You should also maintain a ratio where the potential loss on the investment does not need to be greater than any foreseeable profit.

Beware of unsolicited tips on stocks

In recent years, along with the growing number of retail investors, there has also been an increase in unsolicited stock advice posts, calls and websites. These are questionable ploys of tipsters in which they choose illiquid stocks that are usually not actively traded. The prices of these stocks go up as people flock with the flow of messages.

As the price continues to rise, these tipsters continue to unload stocks in large quantities. Sooner or later they start hitting the lower circuits for months to come, leaving investors trapped.

You should never invest or trade on the basis of anonymous and fraudulent stock advice. Most of these stocks are veiled and illiquid. Always stay away from trading or investing, relying on advice, posts, and stock calls. If you receive such calls or messages, report them on SEBI and Exchange phone lines.

Understand the psychology of a trader

Different traders can analyze the same charts from a different perspective, due to different psychologies. On the stock market, when someone buys the stock and the other sells it, both think they’re right. Often, traders become emotionally attached when entering a position. This can happen because when traders put more money into play, the fear of losing money increases.

In such circumstances, the only way to manage your capital is to predefine the risk, plan ahead, and prepare to lose. Remember that you can lose any trade. There is an element of uncertainty for any given series of transactions. However, managing capital is the only thing that will save you through thick and thin and help you be successful in the long run.

The author, Anish Singh Thakur, is CEO of Booming Bulls Academy. Opinions expressed are personal


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