Trading stocks online can be rewarding, but it can also be intimidating and even frightening. Some initially optimistic, starry-eyed investors end up losing large amounts of money to learn important lessons about trading online.
In practice, though, investors who simply make the effort to prepare should be able to avoid all the most common pitfalls. There are four proven ways to reduce your risk when trading stocks online, all of which are worth observing.
Risk is Unavoidable But Can be Managed
Opening an online trading account has never been easier, and many who do so end up becoming quite successful. Trading stocks is inherently risky, though, and investors who forget about that fact are almost always the most vulnerable.
Most traders are fairly rational about their activities and seek ways to improve over time.Becoming better able to recognize and manage risk will improve any stock trader’s odds of long-term success.
With shares in companies collectively worth tens of trillions of dollars trading every day, no individual investor can hope to secure special treatment. Investors who abide by the following four rules, however, can get a handle on the risk they face as active stock traders:
· Diversify your portfolio.
· One of the most common causes of massive losses for individual investors is a downturn in a particular sector or industry. While broad economic slowdowns are to be feared, troubles that strike more narrowly can be even more dangerous. Every individual investor who stakes positions in particular stocks should be thinking at all times about diversification. Failing to diversify acts as a kind of leverage that might pay off in the midst of an industry-specific boom but can be disastrous if things slow down even a little. A well-diversified portfolio should account for the possibility that particular industries will falter along with the threat of more general economic malaise setting in.
· Avoid high price-to-earnings (P/E) ratios.
· Some of the best-performing stocks on any given day will inevitably carry remarkably high P/E ratios. That generally reflects a belief on the part of investors that a company’s future will be quite a bit brighter than its financial fundamentals suggest. Unfortunately, many stocks with unusually high P/E ratios end up being buoyed more by hype than any real promise. Investors generally do well to be skeptical when a stock’s P/E ratio seems far out of line with the competition.
· Keep your costs low.
· What ultimately matters when trading stocks is how much of a return an investor secures with each trade. Overly high commissions and fees can see even a smart, well-informed trader suffering losses instead of recording gains. That will necessarily make trading riskier, as it will mean needing to produce even more “alpha” to stay profitable.
· Stay on top of your investments.
· Some investors buy particular stocks based on tips or rumours and then end up forgetting about them. That can mean seeing a potentially successful trade turn into a loser thanks to a simple lack of timing. Investors who choose to participate actively in the markets need to be aware of the responsibility that comes with that decision. Even a quick daily look at the members of a portfolio will help keep associated risk to a minimum.
The Value of Accepting that Risk is Part of the Equation
Some investors get started with trading stocks online while labouring under overly rosy ideas about how things work there. It will always be better to recognize that risk is inherent in trading stocks, and taking some concrete precautions can help keep it controlled.