Top Stock Investment Risks And Managing Them

Stock Trading Is not Gambling

There are a few different stock investment risks. However, stock investing in not gambling. It is not pure chance. I do enjoy the occasional scratch off ticket. But, when I'm playing with larger sums of money I prefer to have more control over it.

When I play the stock market, I have a grasp on which stocks to buy and which stocks not to buy. Also when to get out of a bad investment.

I do experiment with new techniques. But every loss of money is a learning experience, unlike when your lose money from gambling where it is a fact that the house always wins. Here are the main stock investment risks.

Risks With Buying Long

The most common of the stock investment risks is simply buying stock outright. When you buy stock long, you are paying with 100% of your own money. Unless of course, if you borrow the money. This is more risky.

The only money that you are risking is the money that you put into the stock. So, your investment is effected only by the price of the stock. Of course, stock prices can be very volatile and is effected by numerous market forces.

Risks With Selling Short

Another one of the common stock investment risks is when you sell stock short. Selling short is more risky than buying long. When you short a stock, you must have the money to cover it in case the stock goes up.

When you buy a stock, if the stock goes down you lose money and if it goes up, you profit. But you never have to come up with more money if the stock goes the wrong way.

If you combine short selling with borrowed money, you can really lose out.

Trading With Borrowed Money

One of the worst of the stock investment risks is leveraging your money to buy more stock. This is common among day traders. Day trading is when an investor trades many trades on a daily basis with large sums of money. This takes great dedication.

There is one way of trading that is more high risk. This is when people borrow money for trading or decide to trade with borrowed money. Also when you trade on margin, which is basically borrowing money from your broker to make trades.

So, either way, you are leveraging your money greatly. Thus, you have a chance of getting a better ROI. But, the other side is that the greater amount of money that you would make if you are right is the same amount of money you would lose if you were trading in the wrong direction.

Thus, leveraging your investment with borrowed money is more risky than trading with all your own money.

Techniques To Limit Your Risk

You can limit your stock investment risks a few ways. The main one is a stop loss order. This is when you tell your broker to automatically sell a stock when it reaches a certain price or percentage.

This way, you can save some money if the stock goes too far in one direction. This method can also be used to secure a profit. To do this, you place the order in the direction that would be profitable for you. Then, if the stock goes to that price or percentage, it gets automatically sold. Thus securing your profit.

There are a few other ways that traders use to protect themselves from unwanted loss. Some include stop loss orders, buy stop orders, and buy limit orders. These are useful techniques to use if the above scenarios scare you.