HOW TO LIMIT STOCK MARKET LOSSES
A lot of seasoned investors will tell you the stock market is a great investment since it can generate hefty returns, but accompanied with risks. In simplest terms, investing in stocks is tantamount to huge returns but great risks. Many factors affect stock movements, expected or unexpected ones, given the stock market fluctuates in nature.
So budding investors ask: Is it possible to insure their stocks in order to prevent losses? As of this writing, traders cannot evade such losses. However, there are various options available to insure or hedge against losses, which will be discussed below.
Risk in the stock market is inevitable. Good thing diversification is designed to limit non-systemic risk, which is done by investing in various assets. This risk management technique aims to neutralize the net loss from a decline in stock prices from other instruments. It is important to diverse your wealth between investments with consistent and volatile returns when employing this strategy. In stock market, safe stocks see no volatile movements in prices and pay dividends. To insure individual stock investments, it is advisable to invest in a whole index, including the Dow Jones Industrial Average or S&P 500, which holds many stocks. You can also diversify your portfolio by investing in bonds, commodities, currencies, and funds. Most conservative investors consider the US government-backed Treasury Bonds as the safest asset. A portfolio with a percentage of 10-year to 30-year US Treasury Bonds can smooth out risk-related stock market losses.
Options are a sensible tool in hedging risk and securing stock losses. Just a recap: An option is a contract between two parties wherein the buyer possesses the right to purchase or sell a stock at a preset price and at a predetermined date. A call option gives the investor the right to acquire a stock at a strike price, hoping the stock will escalate in value higher than the strike price. On the other hand, a put option enables the investor to sell a stock at a strike price, hoping the underlying stock’s price will fall. Buying stock options for individual stocks is a pricey way to shield risk-related losses relative to volatile stocks.
Other Types of Options
Aside from stock options, there are several different options which provide leverage and market exposure to investors. Index options are cash-settled financial vehicles which obtain its value from an underlying index. The contract owner holds the right to purchase or sell a basket of assets, including the Dow Jones Industrial Average or S&P 500. Particularly, index put options give insurance to investors in times of a bear market. During this period, an index put option will generate solid returns while assets in a portfolio will tumble. ETF options insure a sector of stock investments and can replicate entire indexes or specific sectors such as energy, healthcare, and technology. ETF options can also be determined in the underlying asset. VIX options allow traders to make speculations on market volatility without taking into account the price of the underlying derivative. This cash settled asset are a great way to diversify and hedge portfolios.
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