Risk Management Techniques For Investors In Stock Market

Risk is an inevitable part of any business. There is no such theory or formula that can eradicate the 100 percent risk, but with the help of risk management, you can definitely reduce the impact of the risk on your portfolio. The risk in the financial market is also known as the loss incurred by a trader. If traders can manage their risk correctly, they can avoid or minimize its impact and make money.

Learning Risk management is as necessary as learning a trading strategy. If you fail to manage the risk, you may lose all your money in one or two trades. So, we have come up with this article to help you manage your risk in the stock market.

• Make a better plan for your trade:  It is said when you have made a good plan, it means your half work is done. Planning involves various parameters before you start involving yourself in the stock market. The parameters include the objective of your trade, time commitment, goals, attitude toward the risk, available capital, ability to manage the records, and above all, selecting the right broker for you. Some brokers might not use Risk Management Software for Stock Market, which may lead to loss. Thus, make sure you are able to read the company's financial documents, be able to judge the market movement, have a good understanding of the economy, etc.
• Keep the one percent rule in mind: This is the basic Rule of Thumb that every trader must remember; this rule suggests that you should only invest 1 percent of the total amount you have in one specific trade. Let's say you have Rs. 10,000 with you for investing in the stock market; then, you should only take a position in any underlying asset not more than Rs. 100. Some wealthy traders might go up to 2%, but we recommend you not to exceed 2%.
• Defining the stop loss accurately: defining when to stop trading and exiting from the market is the best part to avoid the risk in the stock market. Traders can do this with the help of fundamental analysis. They may consider Fundamental Analysis Software Free Download to set the stop loss points and take profit points for their trade. Traders can decide on the stop loss and take profit points by applying the support and resistance levels.
• Calculate Expected Return: It is important to calculate your gains before executing any trade. This calculation helps the trader compare different trades and select the one with the highest returns. You can use the below formula to calculate the expected return:

[(probability of profit) X (take profit %)] + [(Probability of loss) X (stop loss %)]

• Diversifying your portfolio: every business is susceptible to lose, which may affect the company's stock price and ultimately affect your portfolio. Diversifying your investments in multiple stocks is the best thing you can do here, so even if you face a loss on one stock, you may recover it from the other. Understand Diversification does not mean dividing the stock equally. It also does not mean investing in similar risk exposure stock; suppose the stock of Reliance petrochemical and reliance electronic might have the same risk associated. So, divide based on different risk exposure.
• Add some non-Cyclical stocks in your portfolio: these are some stocks that never face a downtrend, for example, stocks of pharma companies, FMCG products, etc. People cannot stop consuming them. There is a chance people might reduce their consumption but cannot stop completely. This type of stock helps you recover the loss from any other stock from your investments. Always invest in such stocks to help reduce the impact on overall investments. Many experts have named these stocks as Defensives. 
• Invest in dividend-paying stocks: Many companies have a strong history of paying timely dividends to shareholders. Try to invest in such stocks that can pay you regular dividends without any risk. Adding such shares to your portfolio can shield you from the risk involved in equity shares. Usually, such established companies will not put a cut on your dividend because it may affect the impression of their financial health.

So, we have seen a few techniques through which you can manage the risk in the stock market. If you are new to the stock market and want to learn from scratch, use Smart Delta Software to help you find all the relevant information you need to begin your journey in the stock market.