Limiting risks


Sock trading is risky. Typically, the higher the risk the greater the potential returns. The more risky the investment, the greater the chance you could loose money.


There are multiple ways to limit risks, the easiest are as follows:


Buy more stable stocks:

Historically some fields are more unstable than others are, technology/Internet companies (Facebook for example). Internet companies can be much more volatile than long-established companies selling physical goods (such as Johnson and Johnson, or McDonald's). If you invest in more stable established companies your money will be somewhat safer; however, the downside is established companies will not grow nearly as fast as smaller, less stable companies.


Buy index funds or ETFs:

Index funds are covered more on the ETFs page. These, basically, are a massive fund that buys the securities of a market. Therefore, an index fund of the S&P 500 would own the 500 stocks in the S&P 500 and the price will move as the entire constituent stocks move. If the market goes up the mutual fund will go up, if the market tanks the mutual fund will also tank. These are some of the most stable stock market type secures, because they own many of everything.


Get out of stocks:

You cannot lose money that is not on the market. However, you will also not make any money either. You can buy bonds with guaranteed grown rates or just keep funds as cash. There is nothing wrong with keeping money under a mattress or in the bank, just be aware of inflation losses.


Of course, there are other ways to eliminate risks: hedging, leveraging risks, options, futures, and multiple portfolio balancing techniques. However, many of these require thousands of dollars and for casual investors these may be more of a hassle then they are worth.


Article by Jacob K Lloyd

Published: 2 July 2015

Last updated: 13 Sep 2015



Authors note:

In my opinion non-professional investors should buy low expense index funds and bonds for the majority of their portfolio, with choice stocks holding no more than 30% of the portfolio’s value. Stocks are risky, commissions add up, and the market is merciless, if you are not the best of the best you can lose big. Again, these are Jacob Lloyd’s opinions and do not necessarily represent the views of Starting with Stocks.

How to limit stock investment risks?



Basics of limiting stock risks for beginners:


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