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Tips On How To Diversify Your Risk In The Stock Market

Sep 6, 2008
Stock market is not for the faint hearted they say. That is definitely correct and a lot of people who join the stock market bandwagon hearing stories about loads of money to be made usually are the ones who burn their fingers in the stock market very easily.

One single event can cause so much havoc in the market they can cause your portfolio to be wiped out in a day's session. That said the above statement is true that stock market is not for the faint hearted. But then there are always ways to make money in the stock market and there are a few tips which can help you make sure that you do not lose shirt in the market.

The best thing that you need to do is that make sure you have a portfolio which will help you diversify your risk. Now in that portfolio you can have stocks which are defensive in nature and some stocks which are aggressive in nature. Also make sure that the portfolio has stocks which pertain to different industries. For example it will be risky to have all the stocks from the technology industry because if tomorrow something happens to the technology industry may be like dot com bust in 1991 then all your stock investment will be down to zero.

So the key to the successful portfolio is diversification. Another way to diversify the risk and in effect stop the losses is to have a stop loss on every stock at a percentage of the average cost price. So if there is a stock meltdown tomorrow then you can at least be reasonably sure that you have not lost all your money and instead you have put a cap on your losses.

Also make sure that you book profits on the stocks as and when you reach a particular threshold level. That I would say is the toughest thing to do because when the stock is going up most people will usually tend to not sell in the hope of making more profits.
It is the single biggest mistake a lot of people do when they start in the stock market and start making profits. Greed for more money results in major losses for the some.

Also a getting a good financial planner is a must to make sure that you have wider investment avenues than just stock market. That helps as that means that you have some amount of money safely parked in investment vehicles on which can fall back on in case of need. That safety cushion gives you some amount of room to play with fire in the stock market.
About the Author
The author is provides trading tips for stock market beginners on his website. He also suggests that stock market beginners need to use more caution.
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