Investing always come with some level of risk. Typically, the higher the returns that are promised, the higher the risk involved. If a high return is offered as being low to no risk, then it’s likely that it is a scam or not quite what it seems.
In 2021, investing made the mainstream news with the GameStop, Robinhood and Reddit short stock drama. It was a case of regular investors banding together to challenge the exploitative actions of a hedge fund. This story flagged the reality that hedge funds and Wall Street firms only have their own interests in mind and that the individual trying to trade will never be able to compete against them.
This doesn’t mean that there is no way to trade and invest safely. It’s possible but it does require you to be more careful and fully educate yourself about the potential risks and about the company that you are using to trade.
In this article, we will look at the steps you need to take to trade safely – though risk is always a part of trading – and possible alternatives to traditional trading that are lower-risk options.
Do your research
Trading based on social media hype is a good way to lose a lot of money. The best way to trade safely is to fully research the current economic climate and the stocks that you plan to invest in. Read up on each stock that you’re considering purchasing and examine how it has trended historically.
If you plan on using a trading app, thoroughly research your options before signing up. Most are legitimate and trustworthy but the popularity of trading by individuals has created a market ripe for exploitation. It is also important to know what fees and penalties each app might levy.
Use a stop-loss
A stop-loss order is an essential tool for trading safely. While we’d all like to be on the winning side, stock trading will always have its up and downs. A stop-loss is a preset dollar amount or percentage. Once a stock dips below the set amount, the stop-loss is triggered and the stock is sold.
Trade within your limits
In order to trade safely, you need to set an amount to trade with and not go over it. It can be very tempting to keep spending in order to chase the market or to try to buy yourself out of trouble. This can put you in a very dangerous financial position.
Sticking to a limit allows you to trade without as much worry. Having a separate account that you only use for trading is a good way to avoid dipping into your savings.
Day trading bots
Automated day trading software has become a major selling point for trading apps. They advertise that the bot can trade faster and smarter than the average individual, and that all you need to do is put money into your account and wait.
Day trading bots rely on an AI algorithm. The quality of the bot depends entirely on the quality of its programming. This means that while day trading bots have the potential to be a great tool for investors, they can also be a waste of time and money.
In order to reduce risk, it’s best not to use a commercial trading bot. If you are experienced and well researched enough to program your own bot then it could be a very helpful tool.
Stock trading, especially day trading, has been glamorized by TV shows and movies, especially since the 1980s. Even though movies such as Wolf of Wall Street (2013), Wall Street (1987) and American Psycho (2000) show the dark side of trading and corporate capitalism, they also show the expensive lifestyles that could be possible.
Low-risk investing might not generate the same excitement but it is a smarter option in the long run.
One of the best options for low-risk investing is savings bonds. These are essentially loans to the government. Due to their nature, they carry very low risk. The United States offers two types of savings bonds – one is fixed rate and the other is adjusted for inflation. These are long-term investments and not suited for a quick turnaround.
Other low-risk options are to be found in certified deposits (CDs) and high-yield savings accounts. CDs are also a long-term investment with a penalty for withdrawing early, whereas high-yield savings accounts can be used at your discretion.