Kathmandu. The higher the potential for returns when investing in the stock market, the higher the risk. In such a situation, understanding risk management is important to build a successful portfolio. This reduces the possibility of losses and keeps the investment journey going.
There are two types of risk in the stock market, systematic and unsystematic. Systematic risk affects everyone. It is caused by factors such as recessions, geopolitical events, market declines, inflation, and natural disasters.
Unsystematic risk varies by individual investment or sector. It can be reduced through portfolio diversification. Here are 5 strategies for risk management that every investor should know.
Investment Diversification: Invest in different asset classes. This is the main strategy for risk management. Depending on your risk tolerance, financial goals, and specific tenure, you can invest in various asset classes such as stocks, bonds, real estate, gold, and silver.
Benefits: Investment diversification reduces the impact of poor performance in any one asset class. If the stock market declines, it can be compensated by the appreciation of gold, silver, or real estate.
Do not let the loss in any one share exceed 2% of the total investment: According to this rule, the loss in any one share should not exceed 2 percent of the total investment capital. If you have invested Rs 10,000, the 2% rule will ensure that you only risk a loss of Rs 200.
Benefits: This helps keep losses low. Any emotional or mental impact can be avoided.
3–5–7 rule, losses should not exceed 7% of trading capital: 3–5–7 rule is a straightforward risk management strategy. This limits the risk on each individual trade. 3 percent is the risk you take on your trading capital. Limit the total risk on all trades to 5 percent. The maximum loss for the portfolio should not exceed 7 percent of trading capital.
Benefits: This rule helps balance risk reward. Provides returns and a safety net.
##Stop–Loss: Stop–Loss orders are a method. In which you hold shares to sell when they reach a certain price.
Benefits: This helps limit potential losses and protect your investment.
Emergency fund: An emergency fund is a good idea for those who need it most, in addition to the investment amount. Keep it.
Benefits: An emergency fund can help you avoid selling your shares at a loss.
(Note: Investing in the stock market is risky. It is advisable to invest only after understanding your risk tolerance and the market.)
