Risk management: A beginner’s guide

Johannesburg, 14 May 2020

For the uninitiated, the trading world can seem a little daunting. Most prospective investors will be enthusiastic about getting involved with stock trading, but are also nervous about putting down cash when they are not particularly well-versed in trading or investing.

This is natural; we all harbour some restraint when we are new to something, but fortunately, there are some things that new traders can do to help mitigate any losses they may be privy to when first starting out, and help them avoid certain pitfalls. Doing this is generally referred to as risk management, and is highly recommended whether you are a novice in the trading world or a pro.

The 2% rule

One such strategy that is often followed by traders is known as the 2% rule. As a basic rule of thumb, some traders think it is always a good idea to keep any investment below 2% of your total available trading capital. Spreading your investment means that if a stock does tank, it will not make much of a dent in your overall investment capital. It is the trading equivalent of not having all your eggs in one basket, and while your personal percentage may differ depending on how much you are likely to invest, it is a sensible idea to spread your investments out, and let your capital rise slowly rather than hoping for the big, quick pay-out.

Trading tools

In the modern age of stock trading, the vast majority of it will be done online, and in particular, on a smartphone. With plenty of investment apps in Google Play and Apple Store, you are spoilt for choice when it comes to choosing how to trade your stocks, indices, commodities, or crypto.

When it comes to risk management, however, not all apps are created equal, so it pays to do your homework and check out what each has to offer. Risk management tools provided by easyMarkets, for example, can help trading novices feel far more confident when dipping their toes in the water, as facets such as dealCancellation can undo trading losses one, three or six hours after the initial transaction (for a small fee), as long as it has been activated prior to trading. This is basically a little safety net for those who are not 100% sure about a trade and wish to protect their investment, risk-free, for a limited time. Therefore, if you find a particular stock that piques your interest but is slightly wary of which way the investment will go, simply activate this risk management tool, and see how it performs before your allotted time limit expires. If it loses, just undo it to recover your funds minus a small fee for the service.

App functionality

Some smartphone investment apps also allow you to set limits on how much a stock, indices, commodity or crypto can rise or fall before you sell. This can be extremely useful for those investors who do not wish to risk more than a certain amount of profit, or perhaps are looking for that magic leap in price before selling, but do not wish to be glued to their app 24/7.

This is a great risk management tool for any investor, but it becomes even more important for those who wish to dabble in an area of trading they are less familiar with, often, for example, crypto-currencies. With the sudden and huge recent interest in crypto-currencies across the globe, many investors are curious, but know less about these new forms of a monetary exchange than they do about the more common stocks and shares. Setting limits on their price peaks and troughs can allow anyone to invest in a more volatile area of trading, and not worry that they will wake up with either a huge loss, or be a few hours late for what would have been a great moment to sell.

Always diversify

Lastly, diversifying your investments is always a good idea. Do not just invest in one industry sector, or even one geographical region. If a market takes a turn for the worse, your whole portfolio doesn’t take the hit if you have spread it across various different stocks, commodities, indices and currencies. Similar to the 2% rule, this is merely a case of not putting all your eggs in one basket; but instead of just spreading your investment across different stocks, this is all about investing in different areas.

Risk management is generally a case of using common sense, but it is often useful to listen to the professionals when you start out investing. Keep to these guidelines, and you should find yourself in a far better position down the line than going in blind. Yes, there is always a risk when it comes to investments, but the rewards can be huge for those who take the time to study their environment and learn from those in the know. Get studying and get investing!