Safety is an illusion. You have all heard and experienced that, ask yourself, Is it safe to walk down steps, take a walk, cross the street, drive your car, sail your boat, swim in the ocean, fly your plane, ski and scuba dive, etc, etc, etc. So it is fair to say that it is not likely to have complete safety in life.

In the investment world, highly rated bonds were considered safe in the past, but that has been proved not necessarily so.

In the world of stock trading safety is established with the exit strategy, and like most safety it is imperfect, at best, but it does work pretty well if you have established a good plan. And as a player/trader you must begin with a clear understanding what is adequate safety for you. This column talks about the “Plan” throughout the year, Plan your work and work your Plan is a reoccurring theme here. It is your money so for sure it is your responsibility.
Knowledge of Yourself -Your Plan is very helpful, and is used by professional traders to help them Win in a game where most lose. Knowledge is Power!
Again the Reminder on Risk
Risk is everywhere including trading the markets; you must learn to manage risk.
When you seek profits in trading markets there is a certain factor that creeps; it is the “Greed” factor; then comes the Risk factor that gives rise to the Fear factor in trading.
Likely, many bad trades are the results of a misunderstanding of/or an initial failure to pay attention to risk.
Once that risk becomes real for many folks, it can turn into fear and panic. Risk means we can lose something we have, and often traders fail to realize just how much is at risk until it is too late for them
One of the most compelling facts regarding risk of loss in the market is that if a position loses 50%, it must then double, i.e. move up 100% to get back to even.
It is important to note that risk in the buying of stock in the market is one of the riskiest things on the planet.
When buying a stock, the total investment is at risk. And as we have seen recently, formerly great companies can fall to Zero.
You ask, Red Are there ways to reduce the risk of losing my entire investment when buying stocks?
Sure, we have discussed them in previous articles. One is employ stop loss orders in place or trailing stop loss orders.
In most situations, these orders can work to prevent losing everything. It is unlikely that a stock will drop from USUS$50 to US$ Zero overnight, and most stocks that fail often post warning signs; and while they often fall fast, they usually take a bit of time to hit Zero bottom. In such circumstances, the stop loss may work to preserve capital.
Here is another way to protect an asset (some of us call it Insurance) That is to buy a protective Put. A Put option is a contract whereby the buyer of the Put has the right, but not the obligation, to force someone to buy his stock at a pre-determined price called the strike price any time before the option expires.
To obtain that right, the buyer of a Put pays a premium. The situation is at least analogous to an insurance policy where the insured (stock owner) pays a premium in order to assure that a loss is limited to the premium, plus any deductible.
You can learn about managing risk with options but the major risk in options strategies is that options expire, so your puts and calls only have value until expiration; and assuming no change in the price of the stock, the call becomes less and less valuable as time passes, until there is no time left. Insurance…
Another thought that is often espoused is to diversify. There are differing schools of thought regarding diversification and there are many ways to diversify.
The above discussion lists some of the ways traders reduce and manage risk in a stock purchase transaction.
All of the above is intended to motivate you to seek a greater understanding of Risk and in doing so help you Win.
Again, think Education First.

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Posted by Shayne Heffernan on Jun 21st, 2010and filed underAsia, Equities, Latest News, Limelight, Markets.You can follow any responses to this entry through theRSS 2.0You can leave a response by filling following comment form or trackback to this entry from your site