Every investor deals with a disadvantage that could put his money at risk when investing. Even though an investment promises hefty returns, investors must be aware of the possible challenges they could have with their investment choice. One of the popular investment types that comes with risks is stock acquisition.
Investing in stocks is one of the investment types many financial advisors recommend to people looking into growing their funds. Aside from its proven profit history, there are many stock indices investors can review and choose from to ensure they’re putting their money in the right company.
But just because a company is doing well doesn’t mean you should invest your money in them. Knowing your risk tolerance and appetite is the secret to a thriving stock investment. In this post, we’ll look into the tips to help you understand your stock tolerance and appetite.
Risk tolerance vs. risk appetite
BT.com.au describes risk appetite as the amount of risk an investor is willing to accept to achieve their goals. On the other hand, risk tolerance refers to the practical application of risk appetite. Risk tolerance is the term to describe the degree of variability in returns an investor is willing to bear.
The meaning of the two is similar, and that’s why it’s common for people to use them interchangeably. If you don’t know your risk tolerance and appetite, here are some ways to help you know them better.
1 – List your expectations about stocks and know whether those are true or not.
It’s critical to keep your expectations in check before investing in stocks. One of the reasons many have negative experiences with stock investments is that they start investing with the wrong mindset. Usually, people who invest in stocks and are unknowledgeable about the market have a negative stock experience.
It’s helpful to list your expectations about the market to avoid that. Once you identify your expectations, it’s critical to know whether those are true or not. You must do your part in researching and learning about your expectations to keep them in check with the reality of what the market has to offer.
2 – Budget your monthly income and determine how much you can allot for investing.
After you understand and figure out which of your expectations are realistic, it’s time to budget your monthly income flow. One of the good habits you must start with is budgeting your monthly income. You can do this by making an Excel sheet of your monthly income and dividing it into categories.
You must know your average monthly expenses and savings to do this well. You can allot that for your stock investment once you deduct those from your monthly income and still have extra money left. The thing is, not everyone has an extra penny to spare monthly. That’s why creating an Excel sheet and knowing how much you can allot for stocks would be helpful.
3 – Ask yourself, am I willing to lose the money I am willing to invest?
The thing about investing in stocks is that it does not come with a guarantee. Some people lose their entire investment, while some get to double or even triple their capital. If you have no extra money for stock investments, it can be painful and challenging when you encounter a loss. When investing in stocks, you should know that time is crucial.
If you plan to sell the stocks you’ll buy once you see a minimal increase, you won’t likely earn a profit greater than your initial investment. People with stocks gain a bigger profit because most start investing in a small company with the potential of being successful and gradually increase their investment over the years. That’s why asking yourself if you’re willing to lose the money you’ll initially invest is crucial because you can lose them.
4 – Create a timeline for your investment to assess how long you can tolerate growing the funds.
Another crucial thing you must do to help you understand your risk tolerance and appetite is to create a timeline for your investment. You get to assess how long you can tolerate managing the funds and watching it grow or lose along the way with a timeline.
Creating a timeline could also help you assess the future performance of the company you’ll invest in. You can track their current performance and make predictions based on their data on how your stocks would perform in the next five or more years you’re willing to invest. With this timeline, you can identify how much losses you can tolerate and know your appetite for growing your stock.
5 – Research the companies you’re looking into investing in and familiarise yourself with their data.
I mentioned how important knowing the company you’re investing in is. It’s crucial because those data will help you understand the company’s risk appetite and compare it with your tolerance to know whether they can provide you with ideal investment returns.
Every company has a different appetite for the various risks they are taking. That also applies to the value of shares they sell to their investors. As an investor, you must understand that many factors affect the performance and value of a stock. That’s why it’s crucial to know the management, organisation, goals, and strategies of the company you’re investing in to identify if they’re a good investment.
6 – Ask yourself if you have plans to invest in other investment types.
Lastly, ask yourself if you have plans to invest in other investment types. If you plan to invest in other investment instruments, your risk tolerance and appetite increase. When you have other investments, your risk doubles because the markets of financial investments are volatile and fragile.
At any given moment, your investments could become losses. And if you anticipate that and can move forward financially despite those losses, you likely know your risk tolerance and appetite are already.
Knowing your risk tolerance and appetite will help you make advantageous financial choices.
Investing can be exciting and thrilling but also devastating and challenging once the market moves against you. That’s why knowing your risk tolerance and appetite will help you make advantageous financial choices that will benefit you in the long run.
Written by Bianca Banda