Risk is a part of life, and investing is inherently risky. But just because something is risky doesn't mean we shouldn't do it. Often a risky activity carries with it some significant payoff, and investing on the stock market is such a case. The trick with the stock market is to reduce risk wherever possible, and here's how...
Firstly - decide what it is that you want our of your investments - what is your goal? Include a timeframe for achieving your goal and make a firm decision to get there... we'll get to how in a minute.
Next - educate yourself... Do you know anything about the world of finance and investment? If not, don't worry about it, don't be intimidated - it's honestly not a problem. Take some steps to learn about it - take a course, read read read, talk to others who do know about finance and investing.
Come up with a trading plan - when you've done all your preparation and you think you're ready to throw some money at the stock market, you're not. There's no point trading on the stock market without a plan. Research strategies you'll use and stocks you're interested in and look at their past performance. All that information is widely and freely available.
Do some paper trading - 'paper trading' is a term used to describe the practice of conducting hypothetical trades merely on paper. This is an excellent way to put your own trading plan to action without risking any of your money. All you're risking is hypothetical money, and that's the best type to lose.
If you follow the above steps to prepare yourself for trading on the stock market, you will significantly reduce your exposure to risk. Trading on the stock market can be an extremely profitable experience, but it can also lead to financial loss - the best way to try to avoid that is with with careful planning.
Finally, it is crucial that when you implement your trading plan you have minimum and maximum sell points set for any stocks or contracts that you own. This will allow you to have predetermined exit and entry points - further limiting the risk factor, and creating some safety in the market. Remember, don't make trading decisions based on emotions - the stock market is often a passionate place, but not when traders make trading decisions. These must be made in accordance with the trading plan together with careful analysis - not on a whim.
By Erik Rosenzweig
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