The Ultimate Guide to Managing Trading Risk

The Australian share market experienced unprecedented turbulence in the first week of February 2018 when it lost $60 billion. It was a scary experience for investors in the Australian Securities Exchange as panic gripped investors across Asia indulged in a mad spree to exit the market.

Uncertainties are parts of share trading and investment in equities and investors have to accept it. As fortune favors the brave, you need to learn how to put up a brave face when the odds are stacked up. You need to have a hardened personality to withstand such instances.

The ability to withstand those setbacks and face trading risk are important traits you need to have if you want to be successful in this industry.

Equity investment is risky

Investing in equities can make you rich and prosperous as long as you are ready to take the setbacks and have the courage to come back with a bang. You can’t become a millionaire overnight and even if you do, be ready to lose those millions in a flash.

It is essential to understand the trading risks first so that once you get used to them, you can expect to make lucrative gains in the future.

Risk tolerance is vital for investors

Shares or equities are considered high-risk assets. This is why you should be ready to lose money and even the capital when you invest in shares.

Investing in the share market is not for the faint-hearted. There are factors inside and outside of your business that can take a toll on your business. With that, you should always be prepared.

Market psychology

The human psychology and behavior affect the performance of stocks markets.

For example, the behavior of investors in the US who chose to suddenly shed off stocks and exit the market had a deep influence on Asian investors who acted likewise. It sent the asx200 stocks downhill and created a negative effect in the Australian stock market.

Although the incident had a negative impact on the share market, it’s not something you should fear forever. In some instances, investors can make unexpected windfall gains. This is enough motivation for you to wait for the good days ahead.

Politics can affect stock prices

political unrest

Investors closely follow political parties, especially the ruling party. If they feel the measures or policies adopted by the politicians can be detrimental to the interest of investors, they could manipulate investments that can move the market and even shake it.

This isn’t only true only when countries have to pass through internal turmoils. Some international political developments like the tense situation brewing between the US and North Korea are under the scrutiny of investors across the world.

If a major trading partner of one country witnesses the formation of a hostile government in the other country, the stock market in its country could take a beating. Similarly, the formation of a friendly government in that country could make the markets upbeat. Even revolutions and terrorist activities can increase the trading risk for investors.

Economic factors drive share prices

The stock market is one of the pillars of the global economy. The movement in share prices has a direct impact on the economy of every country in the world.

However, this doesn’t mean that it’s the sole factor that determines economic growth. Interest rates, unemployment, and inflation rates have an effect on countries’ economy, too.

Lowering interests can push up economic growth while inflationary trends can deflate the ballooning growth. Rising unemployment stifles market growth while higher employment rate can help boost economic growth and improve share market.

Calamities are bad for the stock market

natural calamity

Volcanic eruptions, forest fires, floods, and other calamities can have a negative impact on the economy, including the stock market.

If you are ready to cope with the adversities and have the patience and money to hang around for long, those things shouldn’t discourage you. In reality, the stock market experience can be quite rewarding.

See Also: How Has Trade Changed Over Time

The post The Ultimate Guide to Managing Trading Risk appeared first on Dumb Little Man.

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