Minimize Your Risk First





Minimize Your Risk First

Different investors have different investing styles. Some are aggressive some are not. But to me, the most important thing to do in investing is to minimize your risk. Why is it important? Simple. Because, we as a human, hate losing. Research has shown that investors tend to hold losing positions for too long and sell winning investments far too soon. The general consesus is that you have not lost when you do not sell your losing investments.

Aside from that, taking care of risk first is critical to your investment success. This is because it takes you to gain larger percentage in order to cover your loss. Look at the list below for clarification.

% loss: 25%, % gain to break even: 33%
% loss: 33%, % gain to break even: 50%
% loss: 50%, % gain to break even: 100%
% loss: 75%, % gain to break even: 400%
% loss: 90%, % gain to break even: 900%


Let's use the following example; If stock A fell 50% from $ 100 to $ 50, A needs to rise 100% from $50 in order for investors to break even. If you go down the list, the climb gets harder. If you invested in stocks that lose 90% of its value, it needs to climb 900% for you to break even. Wow. This demonstrates the importance of controlling your risk.

Here are a few checklists to help you to reduce risk in stock investing:

Positive Net Cash. Companies having positive net cash has less chance of bankruptcy and hence, your risk of incurring large percentage of losses. In bad time, the company can use the extra cash to defend its position rather than selling off its valuable asset to cover debt payment.

Dividends. Companies giving out dividend is a sign of strength. Without strong cash flow generation, companies cannot pay generous dividend to its shareholders. Furthermore, companies giving out dividend has less room to fall since value investors will quickly snap it up if share price goes down too deep.

Modest Price Earning Ratio. Companies trading at modest P/E ratio implies modest expectation. Stock price will be less volatile to 'beating the expectation' game. This protects you from volatile price swings. As a result, you reduce your risk of losing out huge amount of your investment.



About the author:

Distribute your finance/investing content for free at our article submission service. Meanwhile you can list your site for free at our web directory service.

Other Related Articles

Mid-Cap Stocks: Asset Class With An Identity Crises
Much like the middle child, mid-cap stocks have long struggled to find their identity. Carved out from the upper echelons of the small caps and the lower end of the large caps, the mid-cap sector has a rough definition of stock with a market capitalization of greater than $2 billion, but less than...

Hybrid Vehicles Makes a Turn for the More Powerful Vehicles in the Auto Industry
It is common knowledge among car enthusiasts and car owners that the bigger the vehicle, the bigger the amount of fuel it consumes. With this in mind, several automobile producers have begun diverting a big chunk of their efforts to producing more hybrid 4x4s in the year 2005. Taking...

Necessity of Motorcycle Parts
If you are one of the many people who consider your bike as invaluable as your family, then we know you’re head over heels. We may be judged heavily for this perception but you might even be willing to dump your partner just so you could spend time riding and caring for your bike… though, we hope...