Financial Trading: Why is Known Risk the Best Risk?

No, this is not some sort of elaborate psychological test or a thought exercise. It a genuine question, do you know why known risk is the best type of risk?

Well, let’s use a hypothetical scenario: you are sitting on a park bench on a cool spring day, what would be more dangerous – a brick falling from an adjacent building that you are completely unaware of or a brick headed in your direction, that you have seen with enough time to avoid.

A risk that is known, is preferable than a risk that is unknown – very simply…because you can avoid risk you know about. This is the genius behind easyMarkets latest product – easyTrade – but it’s not the only feature this innovative and surprisingly smart way to trade offers.

Known Risk, Fewer Problems

Because of the underlying financial product easyTrade is based on – vanilla options – it also allows clients to trade without margin requirements. Margin, if you are unfamiliar is the minimum amount in a trader’s account necessary to trade with leverage – if the account goes below that required amount, trades start closing until it is reached again. This could include profitable trades. Another problem “margin stop out” could create when trading is your position (trades) closing and then shortly after the price recovering.

Another benefit which is similar to the advantage no margin trading offers, stop out is also not needed due to the known maximum risk. Stop out is a risk management tool that allows you to set a level at which your trade will close if you are incurring losses. This carries the same danger as margin stop out though – a change in the price’s direction could potentially close your trade. This isn’t a problem if the rate (price) continues going against your trade, but it can be very damaging if the price recovers. Again, this is due to having known risk and no need for risk management tools you would use if your risk was unknown.

Quickly React

Many traders seek robust ways to trade, that give them immeasurable options and tools. Although these are undeniably robust, they can be a hinderance when you want to react quickly. If you are a trader you know that those slight few seconds are important to make or break a trade. If you aren’t a trader – then let me inform you – markets never sleep, they are in constant flux and a few minutes can make a significant difference to your profit or worse your loss.

Although easyTrade can be used in a sophisticated trading system – as hedging against other trades for example – it is also exceptionally engineered for simplicity. This simplicity can translate into speed when needed. In just four steps – choose what you would like to trade, set the maximum risk you are comfortable with, decide the trade time and then choose if the price will move up or down.

Innovation, Support, Experience

easyMarkets has been in business since 2001. It was one of the very first brokers to offer negative balance protection and free guaranteed stop loss (and still offers it today along with many more tools and conditions), to help customers better manage their risk. A long time has passed since then and easyMarkets has managed to remain relevant through its constant innovation and true dedication to its clients.

Its latest innovation easyTrade which offers no margin requirements, high leverage (in a way that is still regulator compliant) and known risk is yet another great and beneficial tool offered to easyMarkets clients.

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4 Crowdfunding Platforms In Singapore – What Are Their Risks And Returns?

Crowdfunding is a relatively new concept that has rapidly gained popularity in Singapore. It is a means by which a large number of people can finance a business via a platform.

There are four distinct types of crowdfunding, each of which caters to different requirements:

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How To Lower Risks When Investing In Stocks

Stock investing is not for everybody. But with a little homework and planning it is possible to select a stock in a manner that reduces your risk and puts you in a position to benefit when its price rises.

There is a great deal of information available on publicly traded companies that can help you decide if its stock is worth buying. But it is a challenge to sift through all the data to arrive at the figures that tell you the real story about its performance and its prospects.

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Not Investing Because It’s ‘Risky’?

Too often we hear of people or even peers who have not begun to explore the idea of investing because they’ve been told that it is ‘risky’. Wait, did you say ‘they’ve been told’? Does that mean that they never even tried their hands on it and come to the false conclusion that investing is risky? Sure, investing entails risk because there’s the possibility of losing money doing it. But do you really know what ‘risky’ mean? Does not losing necessarily equate to ‘no risk’? No.

True risk lies behind what is seldom seen. Having only one source of income is a really big risk. While the money is coming in from your monthly salary, it’s easy to feel safe and secure because you can settle your credit card debts, mortgages and bills. However, it’s this very framed up mindset, that money only comes from working (1 Income Source) that blinds us. We become so comfortable with receiving one paycheck per month that we fail to see the possibility of having multiple paychecks coming in.

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Have you ever thought about “What happens if I got fired?” With layoffs becoming more and more common these days, it is a very real question. Is it simply just a time to go look for a new job to fix that broken stream of income? Or is it time to think about a greater issue at hand? This is the kind of risk I’m talking about, unforeseen risks. Who knows if another massive labour cut happens and you’re one of the unlucky victim? What would you do without 3-6 months of income? How are you going to pay for the bills now? Now, is having a job truly risk-free?

Consider this, what if you had a job while your investments were paying you cash dividends (Sharing profits with shareholders). Now you would have multiple streams of income, depending on how many different companies that pay out dividends consistently you have invested in. Even if you had lost your job, you still have a couple of income streams that does not even require you to do anything to make sure that money keeps coming in. This in turn creates a buffer for if in the unfortunate event you lose your job temporarily. On the even brighter side, you could have income from your job while your investments continue to pour even more income into your bank account!

Is investment still ‘risky’ when you see this side of the picture? Wouldn’t the risk of having only one source of income be even greater?

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Just because you don’t know how to invest, doesn’t mean you can’t learn how to invest! There are many articles here on MoneyDigest and on the internet that can teach you how to invest. Just remember, which is more risky? Having only one source of income or spending some time to learn how create multiple sources of income.

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World Value Invest Fest 2015 Power Lessons [David Kuo]

Previously we explored into the mind of Warren Buffett through Mary Buffett’s invaluable lessons on Mr Buffett’s Value Investment Methodology and some of the power pointers on how to select a company to invest in. This time, let’s draw from David Kuo’s experience on Managing Risks In Stock Investing!

 

What is ‘Risk’?

A term we hear too often, yet never really having a perfect definition of what risk is. There are so many types of risks out there and how do we effectively manage all of them at once? Almost impossible! At best, we can mitigate them, but probably not completely eliminate them. But what good is identifying all the various types of risks affecting you, when you fail to know yourself? Risk profiling. If we don’t even know what is our risk profile, how can we select investments that have risk profile that is aligned to our own? Is it important for them to be aligned? Definitely! Say a 65-year old man who wants to invest his retirement fund for income, would you recommend him to buy speculative stocks with P/Es in the hundreds and no fundamentals? Of course not! Similarly, have we overlooked the risk of not a comprehensive risk profiling of ourselves and check if our investment decisions are aligned?

 

Different Strands of Investing for Different People!

There are so many different strands of investing:

  • Growth
  • Income
  • Blue Sky (Start-ups)
  • Sideways
  • GARP (Growth At Reasonable Price)
  • Bottom-Up
  • Top-Down
  • Value
  • Index Trackers

You don’t have to be afraid that you won’t find one that doesn’t suit you! First you need to identify where you are in life, what your investment goals are, and how much risks are you willing to take on to achieve your investment goals. Different strands of investing entails different risks and requires different investment mindset and strategies. Identify the strand that you want to focus in, read up on the skills and mindset required for the different strategies. For example, Index Trackers would adopt a very different mindset require a different skill set from Value or Growth investing. Index Trackers take on a more passive approach towards investing while gladly accepting the diversification it provides. Growth and Value Investing however requires the ability to not just read financial statements, but also, understand business as a whole and consider it from the point-of-view of a businessman. Both method works, but it depends on your investment goals. Are you trying to get from rags-to-riches? Or do you want to simply take a back seat and enjoy the ride? There’s no right or wrong, but it’s worth exploring and knowing yourself a little more.

 

How To Avoid Panicking

David Kuo shared this very powerful quote which many of us tend to forget – “Do not confuse the price of the stock with the story behind the stock.”

Indeed, does the price of the stock dictate the story behind the stock, or is it the other way around? If you only knew the price of the stock and not the story behind the stock, you would definitely panic because you have nothing to fall back on! David emphasises on the importance of knowing why you bought your stocks in the first place. If you knew the story behind the stock, would a falling price cause you to panic or would you see it as an opportunity to buy more at a cheaper price? If you knew the story, you would at least have the mental and emotional capacity to ride out the rough patch, having quiet confidence that the company’s results will show for itself in the long-run. “There will be delays in our investing journey”, so ALWAYS have a margin of safety! If we can’t eliminate, at least mitigate the temporary losses! Lastly, ask yourself, do you have the courage to invest when times are bad? 🙂

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