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401 K statement risks and rewards

Stock Investing Risk Management


When actively investing in the stock market, a major consideration is determining stock investing risk reduction strategies. While many people may feel that they have the perfect solution to the possibility of losing money from their investments, using a diverse approach toward the purchase of securities is the most robust form of reducing negative consequences. Maintaining a wide range of different stocks within a portfolio can help offset major losses and allow breathing room when some choices are not performing as well as others. A wise approach is to carefully distribute ownership of stocks across a wide variety of options.

In combination with diversification, another technique that can help minimize the losses encountered from one specific stock is to place a stop loss order on the security. Placing a stop loss order on a security is a straight forward process. The investor informs a stock broker to automatically sell all shares of a stock when the price of the stock reaches a specific level. This will establish a baseline that will prevent tremendous losses. As a stock investing risk reduction strategy, this is one of the best defensive measures an investor can take.

Another popular stock investing risk reduction technique is to use dollar cost averaging. When using this method, the investor specifies the desire to purchase a specific amount of shares in a given time period. This allows the investor more flexibility in when they make the actual purchase. The price that is paid can be determined at the lowest value during the time that was specified within the period. This will result in fewer losses if the stock value drops after making the purchase. It can also limit the amount of shares that are purchased if the stock is valued higher than anticipated.

One final approach that many investors utilize is reinvesting in stocks that they already own. By taking the dividends that were earned and reinvesting in the stock, you are limiting the personal investment that needs to be undertaking. This also helps to improve the value of the stock by showing good faith in the value of the investment. Used alongside a diverse portfolio, reinvesting in stocks as a method of stock investing risk reduction will help the individual gain better value from their choices. Using these strategies will help to limit the potential losses when the stock market undergoes difficult times and can help maximize long term earnings.