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Experience is one way to figure out how to handle various risks on your own. But we recommend you a less stressful alternative: read this article. The more you know about these risks the easier it is to avoid or handle them.
Market risk
What is Market Risk
Market risk, in a nuthsell means the risk that arises from the possible negative movements of your positions in your portfolio. In other words there is always a risk that whatever you purchase will loose some or all of its value over time.
Market risk
Risk of choosing a bad broker
Choosing a Reliable Brokerage for Your Investments
Once you decide to manage your investments independently, the next step is selecting a brokerage firm where you can open an investment account.
So, what factors should you keep in mind?
Although market risk cannot be eliminated, one of the most significant dangers investors face is choosing an unreliable broker that could potentially misuse or even steal client funds. You have probably seen flashy advertisements promising things like “Earn €1,000 per day with just one hour of work” or “Follow this strategy and buy a yacht within three months.” These types of promotions are classic warning signs. When an offer appears unrealistically profitable, it is usually misleading. The same caution should apply when selecting a brokerage platform.
Investor protection is another critical consideration. The level of protection typically depends on the jurisdiction where the brokerage firm is registered and regulated. Not all financial regulators offer the same safeguards for investors, so the country overseeing the broker plays an important role in determining how secure your funds are.
Finally, you should select a broker that matches both your investment goals and your experience level. Think of it like choosing your first car. Imagine someone who has just obtained their driver’s license and needs a vehicle for simple city commuting, but instead leaves the dealership with a massive Hummer. Technically, it will still drive through city streets, but fuel consumption will be high and parking will quickly become a challenge. Clearly, it would not be the most practical choice.
The same principle applies to brokerage platforms. It is important to find a balance between the features a broker offers and what you actually need as an investor. Choosing the right fit can make your investing journey far more efficient and comfortable.
- the trading platform,
- the research quality,
- the trading cost
- and the product/market spectrum.
When you are a rookie the usability of the trading platform and the research quality is the most important. After gaining some routine the trading cost and the product/market spectrum are getting higher in the priority list.
How to handle these risks?
It is very simple, use Trading Brokers View. We pay high attention on pre-selecting the best brokers for you. Use our questionnaire to find the best broker suitable for your experience and needs.
Market risk
Taking too much risk
Understanding Your Risk Tolerance Before Making Your First Investment
Before placing your first trade, it is strongly recommended to evaluate your personal risk tolerance. Why is this important? Because investing should not come at the cost of constant stress or sleepless nights.
So, what exactly should you think about?
Consider the story of Tom. One day he receives a call from an old classmate, Lukas, who now works at a brokerage firm. Lukas excitedly tells Tom about the business plan of what he calls the “next Facebook.” According to him, once the company goes public, its stock price could easily double or even triple.
Tom quickly convinces himself that this is a once-in-a-lifetime opportunity. He starts imagining how wonderful it would be to finally buy the countryside weekend house he has always wanted. However, with his current savings, even a tripling of the stock price would not be enough to afford it.
That is when Lukas introduces another idea — using leverage. In other words, Tom could invest more money than he actually owns. Tempted by the possibility of larger gains, Tom goes all in. He even takes out a mortgage on his apartment and invests everything in this so-called “next Facebook.”
But after the company’s IPO, reality unfolds differently. The firm fails to grow as quickly as its management promised, and within a few months the share price drops by half.
What impact does this have on Tom’s life?
He begins having sleepless nights worrying about his finances. He cancels his planned holiday because he must focus on repaying the mortgage. Instead of moving closer to his dream home, he finds himself even further away from it.
Clearly, Tom took on far more risk than he could realistically handle.
Taking excessive risk means exposing yourself to losses that are larger than what you can emotionally or financially tolerate. Every investor has a different level of comfort when it comes to risk, and identifying that level is essential.
Why does this matter so much? Because if you do not understand your own tolerance for risk, you may end up risking — and potentially losing — more money than you can afford.
But how can you recognize when you are taking on too much risk? Some common warning signs include:
- sleepless nights;
- you feel that one of your financial goals are endangered;
- or the worst: you do not know how to pay your bills.if your risk tolerance level is low.
A stock index can lose more than 50% of its value during a crisis. Is that in accordance with your risk tolerance? Obviously NOT! In this case you would better go with a government bond portfolio and have a good sleep.
Market risk
How to handle this risk?
You have two steps to follow.
Step 1: do not invest more than your savings.
This is one of the lessons we can learn from Tom’s story. If you do not follow this rule, you can easily find yourself in tough financial situations. That can even destroy your current standard of living.
Step 2: Know your risk tolerance level
Let’s assume you invest all of your savings. Now ask yourself: how much percent of loss in a year makes you feel those symptoms from above?
If the answer is:
- after 5%: your risk tolerance level is low;
- after 10%: your risk tolerance level is medium;
- after 20%: your have high risk tolerance level.
Again, why is this important? This serves your calmness. If you know how much loss you can tolerate that will help you in constructing your investment strategy.
Just to give you an example: it is not recommended to invest all of your savings in stocks if your risk tolerance level is low. A stock index can lose more than 50% of its value during a crisis. Is that in accordance with your risk tolerance? Obviously NOT! In this case you would better go with a government bond portfolio and have a good sleep.
Market risk
Risk of making mistakes
Making mistakes is inevitable when you are investing.
What should you consider here?
You have to keep in mind that making investment mistakes is absolutely normal. Even professionals do a lot. Warren Buffett, probably the most successful investor in the 20th century, made quite a few confessions about his investment mistakes in the yearly shareholder letters.
What are the most frequent mistakes?
- Making bad investment decisions. E.g. you expect the oil price to rise, but Saud Arabia suddenly increases its output and the price eventually declines.
- Not following your investment strategy. E.g. your investment period is 6 months but you are restructuring your portfolio after 2 months.
- Not keeping up to date your controlling tool (e.g. excel file) for your portfolio and at the end of the year you do not know if you earned or lost money.
- Execution mistakes: you think you have placed a stop loss order on your gold position but you have not.
How to handle these risks?
- First of all, do not be too hard on yourself. That only makes you frustrated and you should remember: even Warren Buffett made a lot of mistakes.
- Be diligent and patient and follow your strategy! Maneuvering out from your plan will only bring you stressful situations.
- Practice and learning goes hand in hand here. The more you practice investing, the less mistakes you will make. But improving your knowledge is also very important. Several investments books are must reads. Investment courses and educational sites could also help.
- And keep your eyes open: follow the market and the news and think of it as a big financial board game.
Market risk
A Quick Summary
Ask these questions about yourself and think about what it means?
- Should I invest more than my savings?
- What is my risk tolerance level?
- How can I find a good broker for my needs and experience level?
- Is it normal to making investment mistakes?
- What are the most typical investment mistakes?
- How can I decrease the number of mistakes I could potentially make?
Ask these questions about yourself and think about what it means?
Do not worry these are tough questions, and we bet your answer will change throughout time. The interesting bit is that you will need different skills for being an investor and a trader. Here are first 10 steps for both.