Preventing Losses: Beginner Stock Market Investing Methods

A beginner, in stock market investing, is looking to learn how best to make money and minimize their exposure to loss. It is possible to achieve investment returns over a sustained period of time, but a beginner must first understand that all investing involves risk. There are no guarantees that an investment strategy pursued by any investor will produce results.  An investor who has an appreciation for the possibility of loss is in a better position to maximize their returns.

Diversification

One method that every stock market investor should employ is diversification.  Structuring an investment portfolio that is balanced between different types of investments gives an investor the best opportunity to withstand changes in the market that affect certain types of investments.  For example, changes in interest rates have an opposite effect on stocks and bonds. When interest rates rise, stock prices fall. When stock prices rise, bond interest rates fall. The correlations are not always present, but is a general strategy that works over a period of time.

A well structured portfolio that varies the percentage of different investments helps balance this movement between stocks and bonds. This helps minimize losses and maintain a level of stability within the portfolio.  

Investment Styles
The investment style that seeks a balance between value and growth is also a good way to minimize losses in the portfolio. This balance seeks to by stocks that pay high dividends and have exceptional earnings versus those that are issued by newer companies in emerging markets or advance new technologies.  A balance between these types of stocks reduces an over concentration in any one area and helps reduce the risk of loss to the portfolio.

Dollar Cost Averaging

Dollar cost averaging is a process where an equal amount is invested in the market over time. This means that with constant dollars you purchase more shares when the cost of the stock is lower, and less when the price goes up. This will result in a lower share cost than purchasing all of the shares up front. Dollar cost averaging does not guarantee a profit or lower the potential for loss, but it can be used to manage loss by lowering your investment cost basis.

Stock Options

Using options contracts can also provide a way to hedge a portfolio against losses in the market. An option contract is a derivative of an underlying security that is used to protect or provide income against movement in the market. This includes both up and down movement of a stock in the market.

A beginning investor should seek every opportunity to increase their knowledge about investing and learn what strategies may be appropriate for their situation that will help minimize losses.

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