Top Tips for Reducing Stock Market Risk

The stock market is the best avenue for building wealth, especially over the last seven years with bond rates, GICs, and savings accounts providing investors with little or no fixed income. But there is always a trade-off; with higher returns comes higher risk. However there are many steps you can take to reduce stock market risk.

Volatility Risk

The stock market is a volatile place—It has to be if you want to make money. Without volatility, a stock price would stay the same. Even high quality stocks can experience volatility. The key is learning how to understand volatility and what makes stocks move up and down. When it comes to reducing stock market volatility, time is on your side. The stock market goes up over the long run and is thus more volatile on a day-to-day or weekly basis. If your investment horizon is long-term, you’ll have a better chance at seeing positive returns. If you invest in dividend stocks, you’ll earn a quarterly income no matter what direction the market is heading. It’s certainly not uncommon for a stock to experience a one to three percent price variation in a single day. During earnings season, the price movement can be even more drastic. If you’re a long-term investor, though, what happens in this particular quarter isn’t a big risk to you.

Understanding Fundamental and Technical Analysis

Another way to reduce stock market risk is to have a comprehensive understanding about particular stocks. When it comes to predicting future price movements of a stock or commodity, you can either consider a fundamental analysis or a technical analysis. A fundamental analysis looks at a company’s financial statements to predict a trend and entry point: this could include looking at quarterly results, earnings, debt levels, and cash flow. While this takes a lot of research, it will provide you with a good idea about the financial health of a company and its operations and can help you decide whether the stocks are overvalued, undervalued, or fairly priced. A technical analysis predicts future price movements based on patterns such as past price and volume. These patterns help investors identify trends to predict price gains or reversals. Still, even with a large amount of data, learning how to read technical chart patterns is an art, not a science, especially when you can see different technical patters in one single chart. As a result, different investors can see different patterns; one could see a bullish trend emerging, while another could see a bearish trend. Taken together, a fundamental and technical analysis of any stock can help reduce stock market risk.

Diversify Your Portfolio

If you want to reduce stock market risk, you need to have a diversified portfolio. The stock market is a great example of why it’s never a good idea to put all your eggs in one basket. You might be bullish on precious metals and love investing in gold producers. This would of course pay off when gold trades higher. But if gold prices fall, your entire portfolio will take a huge hit. A diversified portfolio reduces risk because it is spread out over a number of different sectors. Stock market sectors are just a way of classifying stocks and grouping them together. As a result, stock market sectors tend to be broad: Basic Materials, Conglomerates, Consumer Goods, Financial, Healthcare, Industrial Goods, Services, Technology, and Utilities. Understanding different stock market sectors can help you identify which areas to invest in or avoid.

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The best way to reduce risk on the stock market is to increase your knowledge by taking a technical analysis course in Toronto. The more you know, the fewer mistakes you’re likely to make. If you want to truly understand the broader stock market and reduce risk, you need to learn how to trade from stock market professionals. Learn-To-Trade.com Inc. is the leading provider of stock market training courses in Canada. Led by licensed industry professionals, our instructors have an extensive understanding of the stock market and proven investing strategies that can help you make money when the markets are bearish, bullish, or moving sideways. That means providing you with the knowledge you need to create an informed, disciplined approach to the financial markets. As the oldest financial educator in Canada, Learn-To-Trade.com Inc.’s instructors are also educators for the Toronto Montreal Exchange, through which its instructors host educational sessions for the major banks across Canada. To discover how Learn-To-Trade.com Inc. can help you reduce stock market risk and make consistent, profitable trades, visit the company’s web site at www.Learn-To-Trade.com. You can also contact us by phone at 416-510-5560 or by e-mail at info@learn-to-trade.com.