Five Ways to Control Risk in a Shaky Market

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by: millicentbrittany
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Date: Sun, 11 Jul 2010 Time: 8:21 AM
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People who invest are going to see market turmoil at times in the trading cycle. It appears difficult to make decisions whether to stick with an option or take a profit. The concern is you may leave money on the table. But as an investor, everyone needs to stay with their fundamental concepts of money management which are proven means of hedging the loss potential while maximizing the upside potential. According to multiple investment gurus, the ideal ways to invest smarter and hedge your investments from downside risk are:

1. A Well Planned Strategy:

You must design and implement a focused, well designed and consistent strategy. You must also be clear on your investment, risks, fees and other expenses. The market has seen large companies disappear in recent months because they did not implement their strategies or follow up strictly.  A well conceived strategy employed when trading in securities may save you from market falls and sleepless nights.

2. The World Economy:

The true economy rapidly moves and will continue to become a globally connected economy. Now market drops around the globe affect much of the rest of the world. You need to be well diversified not only locally but globally. A well thought out decision making process and disciplined action is necessary to get your investments running on all cylinders in such markets.

3. Limiting Your Risk:

Limiting the risks by using "put options" can save an investor time and money. Puts are exceptional trading vehicles that can guard you against realizing losses by allowing you the right to sell your underlying stock at a predetermined price that you control during the purchase.

4. The Use of Funds and ETFs:

A well chosen mutual can help you sleep better at night by spreading exposure across multiple sectors in a managed asset. The potential loss in mutual funds may be reduced as a result of all these assets are very well diversified by asset type. You may want to consider limiting any single stock position to ten percent of your portfolio to further mitigate risk in your assets. You may analyze your portfolio using risk analyzers available online at many online trading firms and financial websites.

5. Maximize Profits by Lowering Costs and Exiting at Your Price:

Use a variety of order techniques when selling stocks and/or options online to save time and ensure the best possible price. Mitigating losses while maximizing gains should be the focus of any good strategy. Therefore it is advisable to compare your options for entering positions.
 
Stop-Loss Orders:
Also sometimes called a stop-loss order. It is used to create a market order when the underlying position moves to a specified level. Stop orders may be an effective and automated means to get out a losing position while mitigating the losses to your portfolio.

Stop-Limit Orders:
Stop limit orders act like stop orders except them trigger a limit order in lieu of a market order. Stop Limits are triggered just like a Stop Order, when the stock reaches at a stop price. However the resulting order is designated at a limit. Except in extremely fast market conditions when the option may trade through the limit before it becomes active, Stop Limit Orders guarantee a specified price (your limit) after the option hits your stop price.

Limit Order:
These Orders ensure a limit price but cannot promise an execution. In a quick market specifying a limit well below the current bid price (marketable limit) will usually guarantee the order an execution, but limit orders are generally entered to capture profits on positions in a profit in your portfolio where the higher price is established and once the security price moves to your price you receive an execution.

To recap, when controlling your own account it is important to have a clear plan, use discipline, not emotion, and utilize all trading strategies and assets. By maintaining this strategy you can be more successful and help you rest easy each night.

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