Stock Trading Advice on Risk

Stock Trading Advice on Risk

Here is some stock trading advice on risk. As a trader you need to understand that there are three general categories of risk: Market risk, investment risk, & trading risk.

Market Risk

Markets rise and fall and that is pretty much outside of the stock traders control. But you still need to understand how you can mange that risk as a trader.

Inflation risk is a risk that most traders don’t think of. Nonetheless it is worth stating. It is more a risk if you do nothing i.e. you do not invest or trade. Leaving money under the mattress will actually cost money, if not invested, as inflation eats away it’s value.

Liquidity risk relates to how marketable your investment is. If you are restricted from buying or selling a stock because it is quite scarce you run the risk of not being able to enter or exit trades at the prices you would wish. This mainly applies to small or microcap stocks.

Investment Risk

Opportunity cost risk means that whenever you invest in a particular stock you have tied up capital that you cannot therefore invest elsewhere. This may sound obvious but bear in mind that hanging on to an under performing stock may have the additional cost of missing a better opportunity.

Concentration risk is similar in that you may be tempted to invest everything into one or two stocks. Fine if they are winners, not so hot if things go wrong.

Trading Risks

There are risks associated with that act of stock trading itself.

Slippage risk is the often forgotten costs of the trades themselves in broker commissions, etc. Frequent day traders often find themselves in a losing position based purely on the amount of commissions paid to trade apparently successful positions.

Poor Fill risk can arise through many factors but simply means that your broker was either unable to fill your trade order at the price you wanted or unable to trade at all.

Be aware of these risks when stock trading. In some cases they are out of your hands but awareness and management of these risks will make you a more successful stock trader.