Stock investments, by their nature, can be a risky undertaking. However, there are many ways to minimize your risk when investing in stocks.

Assess Your Risk Tolerance

An honest assessment of your tolerance for risk is crucial when investing. Are you willing to potentially lose everything you have invested, even temporarily? If a stock has gains of 16 percent, are you willing to accept that it could decrease by that percentage? Understanding the amount of risk you can handle will help you make informed decisions about the types of investments you wish to purchase.

Start Investing with Small Amounts

How much can you afford to lose? Invest no more than this amount. If you are new to stock investing, this will also buy you time to educate yourself further about stocks and investing.

Do Your Research

You will be able to make a more informed decision about whether to buy or sell stocks, and when, if you’ve taken the time to do your research. Study the company, study the history of its stock performance, and understand how to use indicators (such as the Price to Earnings ratio) to compare stocks. Educate yourself on larger trends as well and on how these affect your investments. Learn about trends in particular industries, as well as national and global economic trends, depending on your particular portfolio.

Diversify Your Portfolio

By diversifying your portfolio, you spread your risk across different types of investments. In a portfolio consisting entirely of stocks, investments can be diversified across small, mid, or large cap companies. Stock investments can be diversified with a mix of domestic and international stocks. Diversifying your entire portfolio with investments other than stocks (such as bonds, or less risky money market investments) may also help minimize your portfolio loss overall, even when a stock or stocks take a loss.

Be Realistic and Take the Long-Term Approach

Historically, the stock market performs best over the long term, regardless of short-term volatility. For the average investor, holding onto your investments for the long term and avoiding second guessing the stock market in the short term may be the wisest approach.

Aim for a Rational, Rather than Emotional, Mindset

Keeping a cool head amidst stock market volatility is crucial. It’s tempting to panic and sell when the market is plunging, even though this goes against “buy low, sell high” advice. Unless you are a seasoned financial professional, stick with a long term mindset and keep your reactions rational rather than emotional. Instead of seeing upheaval in the stock market as problematic, look at market volatility as an opportunity for additional investing at a low price.

Buy Low and Sell High

The often repeated advice – “Buy low, sell high” – makes good sense, but can be difficult to put into practice in the real world. To determine whether it’s time to buy or to sell, with a minimum of loss, look again to history and indicators:

• What is the trend for the stock in the last year, five years, or 10 years?
• What appears to be its high value and low value?
• How are trends and economics affecting the investment in question?
• Is the company healthy, and what do national and international trends seem to indicate for the company’s future success?

Consider the Hidden Costs of Your Investment

Fees for buying and selling may vary among brokers. Tax implications may affect your purchase or sale of stock. Compare brokerage fee policies before you invest in stock. Stay up to date with tax code that affects the purchase and sale of stocks, or consult a tax advisor.

Consider a Mutual Fund

If you want to invest in stocks and want to minimize your risk, but lack the time to study stock indicators and economic trends, consider investing in a mutual fund. These funds are managed by a financial professional (fund manager) and spread the risk over a number of stocks that comprise the fund. Mutual funds exist for every kind of investment strategy – aggressive growth funds, lower risk funds, international funds, and everything in between. Study and compare various fund management strategies and fund expenses (incurred for fund management).

Consider an Index Fund