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Risk Management - A Neglected Part Of Your Trading

By: Winston Duke

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PART 5 OF 5
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Risk Management Guide
Trading in the Stock Market can result in huge benefits but you are also exposed to a great prevalence of danger.

To navigate the shark infested waters that is the Stock Market, meticulous risk management control is necessary.

Trading and investing should not be left to fate. Regardless of what your trading strategy is, Risk Management is an absolutely necessity in order to be successful.

There are many methods that can be used to assist in strategic risk management. Several are more successful than others. Some also cost more than others.

Among the more effective risk management approaches are Diversification, Options and Stop Orders.
Diversification
Diversification is a significant tool in risk management. Restrict the size of any position to only 5% of your portfolio.
Even though you get wiped out completely in that position, the outcome in your portfolio will be minimal.

Diversification shouldn't simply be relevant to the number of stocks you have in your portfolio. It must incorporate diverse sectors and countries too.
Diversification should include US and Global stocks as wells as ETFS.
Another Risk Management Tool Is Options
Options can be utilized for all out speculation, as a investing vehicle or as an investment hedge.

If you put it to use as a hedge, you would purchase the stock and an accompanying Put.

On the other hand, you can buy the stock and sell a Covered Call.
Both of these approaches, buying a Put or selling a Covered Call, have their benefits and drawbacks.

The benefit of buying the Put is if the stock loses value, the Put Option will be gaining in value to largely compensate for the damage to the stock's worth regardless of how far the stock falls.

One disadvantage, and it's a small one, is if the stock increases in price, you lose in the value of the Put Option, but your lost is restricted to the amount you paid for the Put Option.

An added disadvantage is if the equity price moves nowhere subsequent to buying it, the Option loses value as time passes.

With a Covered Call on the other hand, if the stock price moves nowhere after buying it, you still will make money on the Covered Call. Remember you sold it and as the price declines that is to your advantage.

The Covered Call in addition provides some narrow protection if the stock goes down, but it's protection is restricted more or less to the price of the Option. If the stock pulls back beyond that, you are not protected.

Also, when you sell Covered Calls, you restrict your upside profit because as much as you gain in the price of the stock you will be losing with the Option.
It is important to take note of that whenever you buy an Option, your gain is as far as the stock price could go. In the case of a Put, it can gain as the stock price pulls back all the way to zero but a Call is limitless.

Well at least that's the concept, but we all know that stock prices will not go all the way to the moon and gravity shall grab hold of up sooner or later.
Keep in mind, this is not a session about Options and any talk about of them is perfunctory and restricted to the scope of these discourses.

Another one of risk management techniques is the use of Stop Orders
To learn more about the above subject, GO TO http://www.stock-trading-guru.com/Risk-Management.html for more detailed information.

Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market.

Winston Duke has been a participant in the stock market for many years. He is also the creator and author of several web sites including
tobagosite.com
Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market.

He has many interests and has indulged himself in a multiplicity of sectors but his true and enduring love is in dealing in the Financial Markets.
As an undergraduate in College, he tutored in the Academic Foundation of his University. While Winston was still in Graduate School, he left to start his first business. Since then he has been involved in many different businesses and interests.

Though his interests are many and varied, and he has indulged himself in a multiplicity of sectors, his true and enduring love is in dealing in the Financial Markets.

Article Source: http://depositarticles.com/

To learn more about the above subject, GO TO www.stock-trading-guru.com/Risk-Management.html for more detailed information. Winston has extensive knowledge and proficiency in the Financial Markets. He started trading in the Commodities Market since the mid 1990's and has since become very active in the Stock Market. Winston Duke has been a participant in the stock market for many years. He is also the c

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