If you want to experience the thrill of undertaking risks and coming up with strategies to make profit out of managing these risks, then Stock Markets are your playground. Comparing stock investments to icebergs won’t be wrong. You only see the tip of the problem in both scenarios. It is the massive hidden component that you should be worried about.
Novices tend to get swayed by the so called opinions of seasoned veterans who have spent years developing their trading style with Swing Trading Strategies and day trading approaches. But you need to understand that every trader has his own approach to trading and this largely incorporates the consideration of personal capital, extent of risk that may be taken and personal preference for gaining profit within a specified time.
Evaluate your investments before actually making them. Trust me, they will prove to be a life saver. The harsh fact is that you can never eliminate all of your risks. But evaluating them will give you ample information with which you may manage them in a proper manner for ensuring better chances for reaping profit. Check out the following steps for understanding how to evaluate your investments.
The “TIME” Factor
This is a very important factor that affects the risk determination for any investment. Time is all that matters when considering stock portfolios as the profits generated out of it depend largely on the time that is provided for the value of the stocks to mature. You can either focus on minimizing your risks by holding up your investments for a long time or you could take the risk and trade your stocks on short term basis for increasing your profit margin. However, you need to check whether your preferred asset class justifies the time allotted to it. For example, bonds need to be given less time as there is a high probability of increment in risk if the duration for bonds is increased. This occurs due to liquidity issues. But for stocks and real estate investments, long term is a good option and you can actually expect some good profit from it.
Give Due Consideration to Asset Classes
In the world of stock market, one risk and return type cannot define the outcomes associated with all asset classes. The company’s performance defines whether relevant stock is associated with low, medium or high risk levels. Considering the option of property investments, they may have substantial liquidity risk inspite of being less volatile. The presence of market volatility can also trigger major changes for this investment. Hence, it would be wise to check every aspect of your asset classes before making any decision.
Try to Include Alternative Assets
When considering alternatives for your assets, you should be careful in evaluating its effectiveness. This can happen with non-conventional investments, venture capital initiatives and private equity. All of these offer high returns but have considerably high risk as well due to which these should be approached with immense caution. The best approach to these alternative assets would be to consider them for long term investments which should offset most of the risks that are associated with it.
Don’t Ignore the Wild Side of Volatile Investments
The thing with volatile investments is that they are unpredictable and may swing in either direction depending upon the dynamics of the governing factors. Using the standard deviation measure is the best way to measure the volatility of any financial instrument. Trends such as total returns, especially over a specific period, are analysed with the use of this statistical method. In simple terms, the SD measure allows you to measure the extent to which the values have deviated from the standard values. Volatility of an instrument is in direct proportion to the standard deviation. However, if such instruments are not your cup of tea, then it is best if you seek other options.
Be Wary of External Shocks
No economy is completely invulnerable to external shocks. The impact of political turbulences and economic disruptions can be rather devastating on potential investment scenarios. Interest rates and credit spreads are also key factors that you should keep an eye on. While it is a mighty challenge to predict such upheavals accurately, you can always refer to news updates and research outcomes to identify the problems that may arise or have arisen with respect to a particular investment.
Check out the Possibilities of Diversifying Your Portfolio
Due to the fact that risks are almost impossible to avoid, you should consider working on other stocks in your portfolio. By diversifying your investments, you would be spreading the risk over a number of options which is much better than trying to avoid risks altogether. A diverse portfolio would also give you greater opportunities for reaping profit. However, you should take care to evaluate all of your options and should consult a financial advisor or make use of an automated trading system for analysing the market trends over specific duration. This should give you a somewhat appropriate idea of things that may be expected in the market in the near future.