Financial markets across the world go through the period of bullish markets to bearish markets and sessions of a sideways trend. While the future is always uncertain, the unpredictability and volatility in Stock Markets and in this case of the local market i.e. Pakistan Stock Exchange can affect anyone, whether it’ll be a new small investor or a big institutional investors, proper risk management tools with good money management tactics are the key to proactively manage your investments inequities.
Here are some of the steps you can take to protect your investments or Profits and minimize the impact of losses in falling markets.
1-Stop Loss order
The feature is designed in a way that you assign a certain price to the broker to sell or buy when a certain price is reached. The stock is automatically sold or bought as soon as the targeted price arrives. The considerations to look for is that investor should know when to place it and for how long the order should be implemented.
In a falling market, you assign certain pivotal, and if the market goes below those particular levels, your sell triggers.
2- Diversify your investment in different stocks
Although, Sir Warren Buffet, is against the idea of diversification, but still for common Investors, It is prudently advisable to have diversified exposures in different sectors and different companies which vary in sizes. This reduces the impact of systematic risk which arises when the investment is done in a large number of the same types of stocks. As these stocks tend to get affected in the same way when a loss occurs, investing in different stocks is a wise to step.
3- Invest in negatively correlated stocks
When the market is falling, investing in stocks that are negatively correlated to the market reduces the harsh impacts of market activity on the stock. It provides balanced returns as the loss on some stocks will be covered by profits on the negatively correlated stock.
However, on the other hand, this negatively correlated stock may underperform your performance in the rising market.
4- Invest in Dividend-paying stocks
The dividend-paying stocks can be a great option to avoid the impact of bearish market effects. The stocks which pay dividend usually outperform the non-dividend paying stocks. Besides that, the investor will always receive dividends without considering the performance of the market, so a certain amount of cash flows always remains available to investors.
5- Don’t let greed and fear overtake you
Investors usually get carried away when the market is bullish as they earn good returns. This turns the path towards greed and they tend to make such decisions that can later end up in loss. Another factor of fear puts the investor in a pessimistic condition when the market is falling thus a quick action of selling stock makes the investor suffer. The investor should do detailed research without letting fear or greed to overtake the decisions.