No stock purchase will ever be risk-free… it’s taking risks that gives investors the opportunity to succeed.
Risk is an inherent part of trading – in fact, it’s practically the basis on which the stock market operates. But the level of risk can vary dramatically.
High and low risk trades both have their benefits… and their drawbacks. Lower risk means a safer investment, but a potentially lower rate of gain. On the other hand, high risk investments mean a greater chance of losing… but can also mean an opportunity for higher rewards and a greater return on your investment.
So how much risk is the right amount of risk? There is no “one-size-fits-all” answer: it all depends on your level of risk tolerance.
Risk tolerance is how much risk you’re comfortable with… how much you’re willing to lose in pursuit of a big payoff.
So, why does risk tolerance matter… and how does it affect you? Here are three reasons…
First, how much risk you take can determine how quickly you meet your goals… or whether you even meet them at all. If your goals involve a short-term period of time, playing it safe might not be good enough. But for someone with more modest goals and all the time in the world, the “slow and steady” approach could be the smarter decision.
Start by taking a look at your investing goals (you’ve formulated your goals, right? If not, do that right now… before you make another trade). Can you reach them by gradually growing your money over a long period of time? Or do you have lofty goals that require big gains?
Also remember that different portfolios can handle different levels of risk. While a large and carefully diversified portfolio
can usually rebound from a loss due to a risky investment, taking too many risks or an inappropriately large one can destroy a smaller portfolio.
Are you an experienced investor with a good track record of success… and a portfolio that can handle some big risks along with the hope of large potential gains? Or are you just starting out with a modest initial investment portfolio that can’t afford to sustain big losses? Regardless of your goals, losing it all just as you’re getting started is a surefire way to end your trading career quickly.
Finally – and this one is important – knowing your risk tolerance can be the difference between having confidence in your trading decisions… and the uncertainty that leads to second-guessing and emotional reactions.
Remember: A high comfort level helps an investor feel confident and in control, helping us to make smarter investment decisions… and giving us the confidence to stick with our plan.
When you have confidence in your decisions, you’ll also increase the likelihood that you’ll keep on making the right ones… and give yourself the advantages you need to grow your portfolio. The tools and information offered by TradeStops can keep you educated, informed – and empowered to reach, and yes, perhaps exceed your investing goals. Use TradeStops with determination and self-discipline. See for yourself what a positive difference the TradeStops way can make in your investing results!