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Before you take the plunge and buy stocks, we’d like to introduce you Stock Trading strategies for the main risks and our top tips for avoiding them.
The risks associated with buying shares
Cognitive biases
As humans, we are all subject to cognitive biases. These are deceptive and falsely logical thought patterns that lead us to make certain judgments and often hasty decisions. We tend to make completely irrational decisions, disregarding arguments and real facts, going against our beliefs.
We must be particularly attentive to our behavior and our state of mind before buying shares, because we can be led to take many risks, because of these famous cognitive biases . The most famous are :
Confirmation bias and selective memory: We tend to believe only in what suits us. Also, our memory can play tricks on us, mainly reminding us of our successes rather than our mistakes.
Risk aversion: these are all our behaviors that aim to avoid risk taking as much as possible. This explains in particular why most French savers choose low-risk, low-yield investments.
The group effect and conformism: we are tempted to conform to the opinion shared by a large number of people, even if they are not necessarily competent on the subject
The disproportionate reaction: we often have disproportionate reactions to reality
Irrational exuberance: We cannot always rely on the past to predict future events. This is all the more true in an increasingly complex environment
To find out more, we have written an article totally dedicated to investor psychology .
Liquidity risk
A liquid stock is redeemable quickly, easily and in large numbers. Liquidity risk therefore consists of buying financial securities that will be difficult to trade in the future.
The risk of bankruptcy
The action is a title of debt for the company, with regard to its shareholders. You should be aware that in the event of a company’s bankruptcy, the shareholders do not have priority in terms of recovering the debts. You should be aware that by investing in a company, you risk losing all of your investments in the event of bankruptcy .
Reduce the risks
We have seen the main risks that surround investing in stocks. We offer you good practices to adopt, in order to reduce these risks as much as possible, or even to avoid them.
Prepare well
Like this article, before embarking on the stock markets, you must acquire a certain knowledge of the stock market and shares. Work on your investor profile and your strategy. Also, to be well prepared before buying your first shares, you need to know the different costs (see above) and the risks.
Good preparation in advance will avoid most risks and allow you to invest serenely, over the long term.
Have a good environment
As we have seen, the group effect is a bias that can negatively influence the investor. Beware of rumors and hasty judgments . Learn from trusted people and institutions. Also, having a good environment means selecting the best information (and source of information), to stay abreast of market trends and best practices to adopt.
Do not try to predict market behavior
A piece of advice we often hear and which is very true: do not try to beat the market. In all humility, be aware that the current environment and financial markets are increasingly complex. It is impossible to predict with certainty the behavior of the market and the price of a share.
Prioritize the long term
Investing is a matter of patience and discipline. By investing prudently on a regular basis and over the long term, you benefit from the powerful effects of the 8th wonder of the world: compound interest.
Diversify your investments
This is probably the most important investment advice, and we want to end this article with it. The most common adage is: don’t put all your eggs in one basket . Faced with the risks of liquidity, bankruptcy and increasingly brutal and severe economic crises, you must protect yourself. Admittedly, risk aversion should not lead you to favor only non-risky, low-yield investments. The best advice is to buy stocks:
From different economic sectors (health, finance, mass consumption, leisure, transport, etc.)
In various geographical sectors (Europe, America, Asia, etc.)
Do not hesitate to balance your portfolio with other financial securities such as bonds, SCPIs or ETFs. Finally, be careful not to have a portfolio that is too unbalanced, because of too large an account line . To do this, carry out a regular analysis of your portfolio, as well as a rebalancing of your investments, if necessary.
Read More: Trading Strategies In World Stock Market
