There are two important aspects to stock trading: choosing stocks and managing the stock portfolio. Choosing of stocks is indeed a tough task. But the work of an investor does not end with it. He/she should be able to constantly maintain the stock portfolio and manage the risks associated with investments. When an investor adjusts the stock portfolio it is called « rebalancing » in order to minimize risk and maximize returns. One should also manage the risk portfolio to manage stocks effectively.
Understanding investments: An investor should know the stock market inside out and understand each kind of investment and the risks associated with it thoroughly. This can be done by reading the newspaper, analyst reports, stock trading websites and keeping track of the stock market on television.
Diversifying investments: Diversification is a very good way to cushion against the fluctuations in the stock market. It is always wise to spread the investment over a large number of companies, rather than investing a large proportion in the same company.
Managing risks: The kind of risks affecting stocks can be market risk or the fluctuation in the value of the financial markets and inflation risk or the risk of rising prices of goods and services over time. Before investing, an investor must decide on the amount to invest and the amount that he/she can is willing to lose. Besides, it important to determine the liquidity of the stocks, the « cut-loss » level (usually should not be more than 10% of the capital invested), and the profit targets. Stocks should also be bought at an acceptable price level by using a limit order. In case an investor recognizes that the stocks are losing, he/she should act promptly to close the stock portfolio and prevent further losses.
Avoiding tendency to gain more profit in the short term: Chasing market trends to buy the « hot stocks » and ignoring the results of stock research to assess the fundamentals of a stock should be avoided under all circumstances.
An investor should determine the financial goals and stick to them. Buying a stock or investing much more than the worth in a stock can lead to huge losses.
Avoiding overreaction: At times the stock market overreacts to some negative circumstances leading to huge fluctuations in the stock prices. However, an investor should not panic under such situations and just stick to the fundamentals of stock management. Under such market conditions, an investor can invest in the long term on stocks that can yield good returns over 5 years and not affected by the current market trends much. Under such situations, « selloffs » can provide a good opportunity to buy stocks at a low price. However, this should be researched before making any decision.
Rebalancing: The stock portfolio of an investor must be rebalanced to suit the changing financial goals. It can be to favor income over growth or a major event in the life of the investor. Also, an investor should reduce the stock risks during a market downturn or invest more during a bullish market condition.
All these aspects and more can help an investor to make prudent decisions about the stock portfolio management and remain safe over the long term.