How to Manage Stock Risk

When it comes down to stocks, the greater the investment or return associated with the stock market the higher the risk. Investing in any common stock will be riskier than keeping the money in the savings account. However, there are a couple of steps that every investor can take and learn how to manage stock risk.

The stock market is one of the most efficient marketplace and the amount of risk involved and rewards can be in motion continuously. Here you will find some steps to reduce the risks involved in the stock market and some simple measures you can use for lowering the risks.

Individual Stock Risk

  • Whenever you buy a stock in a company, you expect that the company must give you the return on your investments. However, if you are buying a part from the real company, always remember that the company can perform worse or better than you expected, and this is known as individual risk.
  • A new competitor can enter the market and put pressure on the downward prices. Or the research department of the company can come up with new widgets, which will cause the sales to take off. Whenever you buy individual stocks, you will be investing in a single company. This company can make bad or good decisions and the consumers will have to buy more or less of their services or products. This is the risk you will be taking when you own their stock.

Timing the Market

  • One more risk that the buyers of common stock assume is the market timing. For instance, you may buy a stock at the peak, or its upswing price. In fact, most of the times of ‘buying high and selling low’ will keep the investors far away from the market.
  • This kind of risk is both micro and macro and it will affect the associated stocks. For instance, the stock market can be at the end in the bull market and the whole market is going to face a cyclical downturn. However, an individual stock market will reach its peak and will start declining.
  • One problem that the investor can never be sure of is if the bull market runs its course and if it will continue for several years. Always remember that while the stock prices are at an all time high, then this does not mean that it is going to get higher.

Controlling Stock Risk

  • There are various strategies that the investors can use for insulating themselves against the risks. Three things that you can do are own a portfolio stock, invest over time or hold the stocks for a long time. Owning a portfolio stock will help you reduce the risk involved in the individual stock risk. The other two will help in overcoming the ‘time the market’ risk.

Creating Stock Portfolios for Reducing Risk

  • Firstly, before you buy the stocks, make sure that you have thoroughly researched the stock purchase and made a good decision, which is based in the given information of the company. If you have done this, then the most common option adopted by maximum investors is reducing the risk that is associated with the individual stock. All you have to do is diversify the risk by owning the share of stock in more than one company.

Investing Over Time

  • The second strategy that investors opt for is managing the stock risk by investing their money over time. If they invest over time then this will lower the risk that is associated with the timing market. The most common way for investing over time is a method called ‘dollar-cost averaging’.

Dollar-Cost Averaging

  • This method will help the investor contribute a certain amount of money in the stock market after a regular time interval. For instance, you can contribute 200 dollars every week from your pay in the 401k plan, which will buy shares of stock in the mutual fund or share the stock in the company where you work, or it can even DRIP.
  • On the loan haul, dollar cost averaging will lower the average cost of all the shares that you own. This will happen because that fixed amount will contribute every week in buying some shares when the prices are low than when they were higher.

Long Term Investing Horizon

  • The last technique that one can use is by controlling the risk involved in your investment timeline. This strategy will help in lowering the risk that is associated with the timing of the market. The last option that any investor would want to go for is buying high and then forced to sell them at low prices.
  • There is no doubt about it that the stock market is subject for short-term fluctuations and more term bear markets. However, in the long-term the stock market will have a strong performance for the return of the investment. For instance, the S&P 500 is one of the widely accepted indicators of the overall market performance, which is given by the average annual return.

So, these are some of the options for managing stock risks. Always remember that past performance is no guarantee for the future performance. However, if you adopt a long-term investment planning horizon then you can minimize the risk to the short-term market downturns.

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