Are you searching for ways to keep your investing risk to a bare minimum? Many people are thinking along those lines after the wild ride the securities market had in 2020. As 2021 unfolds, here are four ways to protect your capital and trade safely.
How to Minimize Investment Risk
Table of Contents
1. Use Account Management Tools
Knowing how to manage the money in your account is an essential skill. There are hundreds of techniques, with one of the most common ones being the two-percent rule.
Using it means you won’t ever make a purchase on a single transaction that is greater than two percent of your total available capital at the time. So, if your trading account has $15,000 in it on Monday morning at the opening bell, your maximum buy is $300.
It takes discipline to follow the rule because as soon as you decide to follow it, almost magically you’ll see all kinds of can’t-miss opportunities pop up. Resist the temptation and your capital will be preserved for more trades later on.
2. Buy Multiple Penny Stocks
Some people think of penny stocks as being inherently risky. The truth is that some penny shares do carry more risk than others, but within the niche there are many that are quite stable.
The key element is knowing what to look for before risking your capital on a stock that is priced below the $5 mark, which is the standard definition of penny stock. The beauty of low-priced shares is that you can easily cut your risk level by purchasing several of them at a time.
Consider that while one share of a blue-chip might set you back $500, you could buy 10 units of 10 separate penny stocks, at $5 apiece, for that same $500.
3. Use Stops for Gains and Losses
It might seem like common sense to use stop orders to limit losses. But even seasoned investors often forget to use stops for gains, which is equally important.
When setting stops, a wise general guideline is to set the gain-side higher than the amount of the stopped-out loss. For example, if you purchase 100 shares of XYZ Corp, at $20, a possible set of stops could be $23 as a cut-off for gains and $18 as an exit point for losses.
Routinely setting the upside higher than the downside allows for greater gains than losses, which is a strategy that often makes sense.
4. Stick with Experienced Management Teams
One of the most time consuming but effective ways to keep your money safe is to study the people behind the companies whose shares you buy.
Yes, it takes a little digging but you can learn a lot in an hour or two of research. Begin by identifying the top managers and executives. Stick to the uppermost tier because they are apt to have the most direct impact on the fortunes of the organization.
It’s usually easy to find extended resumes of the key team members. Scrutinize their relevant education and years in the industry. Focus on how often they’ve changed jobs, what their track record was in prior years, and why they were hired.