Limiting your risks as much as possible is wise! Even with low risk you can still earn a lot by investing. In this article we look at how you can invest with a low risk without reducing your chances of making a profit.
Reduce your loss
The first step in investing with low risk is to reduce your loss. You can do this with online brokers by using a stop loss. A stop loss is a value at which you automatically close a position; this means you cannot lose more than you risk and you earn more with a lower risk.
You can also reduce your loss by using the option of going short. The market usually moves alternately down and up; when you go short, you earn money when the price goes down. This lowers your risk and you can absorb losses down by going short.
You can use these options with an online broker. Click here to compare the best brokers!
Investing without any risk
Ultimately it is wise to invest with as little risk as possible. This can be done by ensuring a good relationship between the risks and the potential return. Imagine if for every £5 profit you make you lose £5. You have to make the right decision in more than 50% of the cases. You can do better than this!
You further reduce your risk by ensuring that you make a profit of £10 for every potential loss of £5. That way you have to make the right choice in less than half of the cases to earn a lot more with investing. You can apply this way of investing by making use of orders. Here it is crucial that you set the moments at which you take your losses and take your profit according to certain technical levels. You can read more about this in our tutorial.
Related risk and return
Ultimately, risk and return are often linked to each other, especially when investing in the long term. For example, the risk of a stock is usually higher than the risk of a (government) bond. This is due to the fact that the results for a stock are often dependent on the operating results and these are often related to the economic situation within a country.
Bonds, however, are loans that are repaid, unless the company really cannot. The price of a bond still varies per period and often depends on the average interest rate. However, if you wait for the period, you will automatically receive the money back at the end of the term.
If you really want to earn a lot with investing, then you will have to take more risks.
Systematically limit investment risks
It is possible to systematically limit the risk of your investments. You can do this by spreading your investments well. For example, you can invest part of your money in gold, a part in a holiday home, a part in bonds and a part in shares. Here you can also put some into short-term investments and some into long-term investments.
By dealing with your investment risk in a systematic manner, you can ensure that you achieve a lower risk level and therefore achieve better results on the stock market.