Investing has rapidly grown in the past decade, thanks to the development of investing apps and virtual trading platforms.
These days, retail investors and traders are just a few clicks away from establishing an account with a brokerage or firm of their choice. And while this has made investing and trading more accessible to a common man, it doesn’t negate the risks involved in investing or trading.
So, how can you minimize the risks involved and become a successful investor or trader?
Here are 15 practices to help with the same:
1) Researching properly before investing or trading
Investors must research properly on all aspects on investments like instruments available in the market, how to get started, investment required, returns, time required and risks etc.
Conducting thorough research is the only way to make sure you know what the chances of success are and how suitable the investment instrument is, based on your preferences.
You can research from ebooks, public forums and websites, etc. to gain more knowledge. You can also ask the broker or investment manager about any queries you may have.
There are following things you should know about an opportunity before investing or trading like – steps on getting started, account opening procedure, requirements by broker, account types available, minimum investment or other requirements, amount and probability of returns, maturity period or lockups and associated penalty of early withdrawal, risks involved etc.
2) Choosing investments carefully
Every investment or trading opportunity has a specific return potential and some associated risks.
When there is a higher return potential – there is also higher risk involved.
That’s why you should choose your investments carefully. You should never lose sight of your long-term goals or overlook the risks involved, in hopes of higher returns.
Let’s say you’ve got a significant amount saved up. Now:
If you’re at an early stage of your career, you can invest a fraction of your savings in risky opportunities like forex and cryptos. You can potentially benefit from higher return rates. Even if you lose your money, you’ve got the rest of your career to earn it back.
If you’re approaching retirement, you should invest in low-risk/low-reward opportunities. While you won’t gain much from those, there is a very low chance of losing your money as well.
3) Knowing the Risks Involved
Investors must know all the risks of the investment opportunity they want to invest in. Different investments are subject to different risk factors.
Three of the most common risks involved in various investment or trading opportunities are:
Market risk – All investments are subject to market risks where investments can decline in value because of economic developments that affect the entire market. Common market risks include Equity Risk, Interest rate risk, currency risk etc.
Liquidity risk – Liquidity risk is the inability to sell your investment profitably and getting your capital back when you want to, due to lack of ready/willing buyers.
Inflation Risk – It’s the risk of your investment losing value over time, due to the inflation rate of your country being more than the rate of appreciation of your investment.
You should also know about the inherent risks associated with an instrument before investing. One way to do so is to conduct thorough research.
4) Investing with Ample Experience
Knowledge and experience are both essential to investing successfully.
To become an experienced trader or investor, you should look for a broker or firm that offers demo accounts to their traders. A demo account simulates real-world trading conditions but with virtual money.
Demo accounts can not only help you get accustomed to the trading portal but also help you form a trading strategy and gain confidence in trading.
Once you think you’re ready to start trading for real, you should do so in small amounts initially.
5) Choosing the Right Platform or Broker
Different platforms are available for different investment needs. You must check the suitability to your needs.
Some platforms or brokerages only cater to stock traders for example NSE brokers like STANBIC IBTC, while others only deal in commodities like members of LCFE, Nigeria Commex commodity exchanges. And some platforms are only for speculation on wide range of investment instruments which are normally traded as CFDs, for example forex trading apps which cater only to experienced forex or CFD investors.
You must also check reliability and regulation of the broker or platform. A platform must be regulated by competent regulatory authority in your country like NSE or SEC or a global top tier regulator as it ensures investor safety.
Like in forex & CFD trading, UK’s FCA brokers, Australia’s ASIC brokers and South Africa’s FSCA licensed forex brokers are regarded as most prestigious. If the broker is regulated with multiple top tier regulators then it is considered as an important factor in FX broker’s trust.
Different trading platforms offer distinct interface and benefits. You can compare trading platforms based on the following points like : Ease of Use, Fees, User-friendly interface, Stability of performance, security, support, Features & instruments offered.
6) Setting Investment Goals
Before you define your investment goals, you should first consider your financial goals.
Your financial goals can be either short-term or long-term. The former includes paying your credit card bills, saving towards an emergency fund and buying or renovating a house.
Long-term goals are more financial strenuous – like preparing for the education of your children and saving up for your retirement.
Based on your financial goals, the capital requirement for the same and the amount you’ve already got saved up, you should develop your investment plan and start trading or investing accordingly.
7) Being Patient while Investing
Patience is the key to building wealth over time, especially for long-term investors.
But, being patient doesn’t mean you should stick with a failing opportunity. It just means that shouldn’t withdraw your investments based on short-term fluctuations.
You should also try to invest from an early stage of your career and invest a portion of earnings regularly. Owing to the compounding of interest rates, staying invested for a long time can help you benefit from significant capital appreciation.
8) Using Risk Management Strategies
Risk management techniques help you from exposing yourself to unnecessary risks.
Two common practices/tools to manage the risks of trading/investing are:
Limited Capital Usage – You must never invest/trade with all your capital. Depending on the stage of your career and your financial goals, you must only invest a fixed portion of your capital at regular – no matter how well your current investment/trades might be doing.
Using Stop-loss Orders – A stop-loss order is used to exit position (sell your trade) when the prices of the underlying assets/securities move unfavorably.
9) Keeping Emotions At Bay
Emotions mustn’t sway your investments or trades.
For example, you must never invest in an instrument just because you have heard that it’s doing well.
Always study the historical returns of an instrument. It will not only detail how the value of security/asset fell during a crisis, but will also show how well it did during progressive periods.
10) Being Adaptive
Investment/trading strategies and opportunities are evolving with time.
Consider Bitcoin. While many investors have successfully earned a lot of money from it, countless others still remain skeptical.
However, being open to new ideas and opportunities doesn’t mean you should invest in every such opportunity. Neither does it mean you shouldn’t critically evaluate your chances of success before investing. It means you mustn’t disregard a new investment instrument without taking a thorough look at it.
11) Evaluating Your Performance
To get a proper view of how effective your strategy has been, you should always evaluate the performance of your investment portfolio regularly.
Two popular metrics to measure the performance of your investments are:
Absolute Returns – It’s the net returns generated by your investments in a specific period. Absolute return helps you visualize how well you’re proceeding towards your investment goals.
Relative Returns – Let’s say you need your investments to appreciate at a rate of 5% to meet a certain goal. You evaluate the absolute returns of your portfolio and find that it’s around 8%.
Should you be satisfied? Probably not.
The reason being the current interest rate of Nigeria is 11.5%.
So, if you can earn better returns by just depositing the money in a bank, why bother investing?
This is where the relative return comes in. It tells you how well your portfolio is doing against the market standards.
12) Managing Losses
Investing and trading can result in losses, even for the most risk-averse investors/traders.
Consider this COVID-19 pandemic. Thousands of investors/traders have incurred losses.
But that doesn’t mean they’ve stopped investing or trading.
So, if you incur a loss, you should accept it and be warier in the future. If you refrain from investing or trading after a loss, you’re only deterring yourself from additional income.
13) Not falling prey to scams or frauds
Scams and frauds are quite common nowadays.
To avoid falling prey to one, never trust someone promising unrealistic return rates.
You must also verify the credentials and check the license of a broker or firm, before investing with them.
If you do become the victim of a scam, you should immediately report the same to the local financial authorities and the police. You should also consult a lawyer and seek legal aid in recovering the damages.
14) Diversification and Asset Allocation
While you can’t modify the inherent risks associated with an instrument, you can definitely adjust the overall risk profile of your portfolio.
Here are two ways to do so:
Diversification – You must’ve heard the saying, “Never put all your eggs in one basket.” This applies to investments/trades as well.
If you put all your money into one instrument, you might end up losing a chunk (or even all) of your capital. Try to invest in or trade with various uncorrelated assets that are unlikely to fail all at once.
Re-allocation – Over time, a portfolio can shift from its original mix of diversified assets and lean towards the securities/assets that have done better than the rest.
While this can increase the return potential of your portfolio, it may as well increase its risk profile.
You must evaluate your investments regularly and re-allocate your resources to match the original mix.
15) Don’t overtrade
Overtrading is the excessive buying or selling of financial securities.
It corresponds to having too many trades open at once or using disproportionate amount in a single trade.
Overtrading is indicative of biased trading and the trader might be trying to make up for a loss or greedy for excess profits. But, irrespective of the reason, overtrading can run you into additional risks of losing a significant chunk of your money.
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