Investing in the stock market is a profitable endeavor, however it makes a lot of people uncomfortable because of the possibility of losses.
Losses in stock investments is unfortunately part of the game, because prices tend to fluctuate. When prices are going down they also constitute a good opportunity to start creating a position in favorable stock investments.
There are, however, a few steps that you can take to avoid losses in the stock market. This will make your life much easier and will simplify your portfolio management.
Buy Only High Quality Stocks
Especially when you’re starting your investment career, it is very important to select stocks based on their quality. In other words, consider stocks not based on speculative goals, instead of buying options in well stablished companies that will more often keep their value.
A big mistake made by some investors is to put their money on stocks that seem to be going up for no better reason than speculation. Whenever this happens, there is a big probability that you will lose part or all of your investment.
To avoid this, look at the underlying conditions of the stock. Is this company making money? Does it have an edge over the competition? These are elements that point to a safer investment.
If you have a good portion of your investment in quality stocks, then you can assign a small portion to big bets that can give you outsized gains if they work.
Don’t Spend too Much Capital in a Single Stock
Another important tip to avoid losing money in the market is to avoid putting too much money in a single stock. This should be true irrespective of the quality of your portfolio.
If you put too much money in a single stock, this means that you can lose a lot of money with just one bad investment. This is something that you should avoid at all costs.
The ideal situation is that you have no more than a few percentage points in a single stock. Many people put this limit at 5%, but it can be even less.
By limiting your allocation to 5% of your capital, this means that even if you lose the whole investment, this will represent only a 5% loss for the whole portfolio, which means that you can survive for another day.
On the other hand, if you have 50% of your money in a single stock, this means that if something goes wrong you can lose up to half of your capital. This is a lot to recover from.