Risks of Trading

Several people are enticed by the prospect of investing their money in company stocks and getting better returns. Wouldn’t we all? As most who have experienced the process, trading is not easy and most definitely not straightforward. As anyone who has delved into trading, one will easily notice that you can lose money fast. Prior to starting trading, you will need to perform no small amount of research and determine your objectives. Your style of investing will vary. Some people are more inclined to low risk investments, whilst others tend to go for greater risks, in a bid to make higher returns.

Before delving into the world of trading, you need to be aware of the three general types or risks which include:

  1. Market risks
  2. Investment risks
  3. Trading risks

Market risks

Such risks are out of the investor’s control. These are bound to rise and fall as trends develop. In this respect, you need to make a thorough analysis and research of the market in which the company you are investing in operates in. Such market risks include inflation risks, which refer to the fact that the money you invest does not grow fast enough to match the cost of inflation. Inflation refers to the regular increase in usual expenses. In addition to this, there is a marketability risk, which refers to the flexibility of selling your investment. You might be restricted from selling for a specific period of time. When it comes to market risks, we also have the subcategory of currency exchange risk. If you are investing in a country with a different currency, you will need to cater for exchange transfers, which may be costly

Investment risks

One of such risks may arise when you lose an opportunity to buy a certain stock due to another more enticing option. Another such risk would be one related to concentration, where you put a lot of your money in one investment, due to the seemingly beneficial outcome. By doing so, you would be taking the risk of putting all your eggs in one basket and hence, the possibility of losing it all.

Apart from this, there are other several trading risks, such as hidden costs which may nullify your return. It is, therefore, your job to analyse the risk versus the return. If you are taking a bigger risk, you should expect superior returns. For example, government bonds tend to be very safe, however returns wouldn’t be too high when compared to investments incorporates. As part of your strategy, you will also need to ensure that you are well familiarised with the markets you are investing in. This will improve your success rate. Also, you should look at trading as a continuous learning experience, where you will always get to know new things and adapt such knowledge acquired to gain higher returns.

Trading is indeed an exciting prospect and may yield several financial benefits in addition to the learning possibilities. Obviously, one should also strive to understand his limitations, so as to ensure he is not investing or risking more than he should.

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