Before anyone begins investing it is important and essential to know some basic principles of investing. Identifying who you are as an investor and what’s your ambitions are as an investor are important. Understanding risk and risk tolerance, return and volatility are just as important.
Many people are attracted to investing by the potential to make money. And while that is completely understandable where there is opportunity to make money and investing there is opportunity to lose money as well. How much risk you are able to tolerate while investing influences the trading decisions you might make.
Almost anyone who is an experienced investor in the stock market will tell you money is made when you learn how to sell a stock. Risk tolerance is the amount of risk that you personally are comfortable with accepting in your investments.
Determining your risk tolerance is rather easy if you consider two factors. What is your time horizon and what is your personal response to the risk you take. Longer-term investments are what most financial planners would advocate. Ever wonder why?
Because the longer you stay in the stock or the longer your time horizon is a greater risk tolerance you will have. Short-term fluctuations in stock prices and market conditions don’t affect you as much because you’re in for the long haul. The shorter time horizon that you are faced with the last risk tolerance you will have.
Knowing how you react to a given situation with your investments is paramount to your success. How do you know how you will respond to risk? Let’s assume you have $20,000 to invest in the stock market.
You choose a well situated company and you buy shares at $20 per share. Over the coming weeks and months the shares began to appreciate and are now priced at $26. If you’re like most people you are feeling pretty good about yourself for choosing such a quality stock.
Somehow the market suffers through a downtrend and your stock follows the lead of the market and begins to descend. Now it is at $24, three days later it said $21. By now you should be feeling the pressure and attention of trying to decide should you sell or hold on.
Meanwhile as you try and decide what you’re going to do your stock falls to $17 per share and stays there for three weeks. How do you respond? If you’re honest with your answer, then you are on your way to becoming a successful investor in the stock market. Determining risk and risk tolerance for beginner investors is something you should do before you begin investing.