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Protect Your Stock Market Investments

By Charles Hopkins Published 03/13/2006 | Finance

It is very easy to lose the entire stock market investment unless you have a rational approach to protecting them. Losing can be smooth and fast through misreadings and mistakes. Protecting your stock market portfolio is synonymous with being able to steer clear of these errors.

To protect your stock market investments, it is imperative that you limit the losses on adverse stocks. Accept that it is impossible to know for sure which way the stock is headed next. Hence a disciplined trading strategy is a must for limiting losses on stocks that don't go your way.

Taking a system of disciplined research for understanding your errors is necessary for protecting your stocks. Never indulge in too much risk taking. Investing is synonymous with taking risks; but the risks have to be calculated in relation to the potential returns. Every reasonable investor has a limit to his/her risk tolerance, and to be smart you have find out and respect your personal limit.

Straying past the tolerance limit can be disastrous. This may lead to bad decisions spiraling out of control, involving the pumping in of more and more money in stocks that dont even seem to be very good prospect.

Investors can avoid these problems if they will simply know where their level of risk tolerance is. It is easy to find. Just listen to your inner call for a caution.

Invest in anything unless you understand it thoroughly, will make your stock market investment insecure. There is nothing foolish in not understanding an investment prospect. If you dont understand it, call a pass. If you find you have made a wrong choice, accept that bad things happen and take a little loss rather than allowing it to become big by dragging it further.

Try to form an idea of the fair price and buy at that, and ignore market hysteria. Similarly, if nothing has fundamentally changed with the company you possess stocks of, except that the stock is dropping along with the market, good investors will not be frightened off a good price and prefer sitting tight to selling for a loss.

It is wise not to jump in or out reacting to any hot price signal. Experienced investors do that occasionally but that is likely to drag you to buy high and sell low, a position contrary to the collective wisdom on winning.

Everything that can lead to win-win spots in the stock market can protect your stock market investment. Buying low and selling high is, of course, a standard win-win proposition. To achieve that, one has to be serious, meticulously research-oriented and needs to document every move and the perceived reason behind it.

Avoid penny stocks, day trading and swing trading unless you are an expert in those areas. Analyze every wrong step you have ever taken, and figure out what would have been the best move, so that in similar future scenarios you are in a better position to take the right decision.