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THE RISKS IN SHARE DEALING

        

Partaking in share dealing or trading can be a very profitable form of investment. It is employed by a wide range of investors as a means to build profit. While it can bring good financial returns, it is also carries many risks.

Could I Be at Risk?

No matter what type of investor partaking in shares dealing, there is a risk of loss. Anyone who chooses to take part in the shares dealing market would be wise to gain as much information and knowledge on the topic as is possible before committing funds.

What Are the Share Dealing Risks?

The main risks in shares trading is the possibility of losing all of the invested funds. There is no guarantee at any time that the shareholder will gain as much or any of the funds they put in. While shares trading is less at risk of market volatility than, say, CFDs trading, it is nevertheless affected by these.

Global financial markets are constantly changing meaning the value of shares can go up as much as go down and this will be affected by such things as the economy. If the world is in a recession, then global stocks and shares will go down in value. A share or group of shares that may have been great value last month may now be nearly worthless.

Another factor which could affect your investment is the health of a company. What if they go bust? Does your share type mean you will get paid? If it is an ordinary share you at more risk, and may not be paid your money in the event of a company going under. Remember: creditors and loans will need to be repaid before the shareholders receive their money.

The type of contract you enter into will have an effect on your risk exposure. For example, if you decide to enter an Extended Settlement contract, you must be aware of the higher level of risk this type of trading carries.

ES contracts are essentially based on margin, which means that while gains can be large, losses can be higher than the initial investment, as you will be liable to cover the loss and any additional funds to settle the contract. If you reach expiration date and the position is still open, you are required to settle by physical delivery of shares. Are there enough shares in your account to cover this?

What can I do to Manage Risk Exposure?

An important element to shares trading is analysis and research. This may sound time-consuming but can make a large difference to the success of trade. For example, if you want to buy shares in a company, you will want to know what their past performance is are they worth the investment? How likely are they in giving you a good return?

Another good way to reduce risk is by broadening your portfolio. This means spreading shares over a large amount of industries and areas. If you 'put all your eggs in one basket' then you stand to lose more should the shares lose their value.

A broad portfolio is known as a 'diversified' portfolio. Diversification of a portfolio aims to reduce risk by building up a range of investments which are not likely to all go in the same direction. It can lead to a more consistent performance.

The type of broker you use will also make a difference to your returns. If you are fairly new to the market, it is probably wiser to employ a stock broker who will provide many extra features, such as strategy and market advice. They will charge for these services but you will be more supported.

A financial analyst will look at market risks by using some of these measures:

Correlation

This is the linear regression correlation of your investment portfolio

Market Beta

This is the linear regression 'slope' of any single share

Volatility

This shows any daily changes in the daily price of the portfolio

Risk Ratio

This shows which areas will offer higher risks

Things to consider before trading shares:

  • How much money am I prepared to lose?
  • Employ a stop-loss and make sure this is pre-determined
  • Consider a limit order and only buy shares at an acceptable price
  • When the trade reaches your profit target, take the profit

Am I Suitable to Trade Shares?

Not everyone is suitable to trade shares. This kind of investment carries cost, time, effort and energy. Prospective share dealers must be prepared for the costs and risk to loss. They should be willing to research and find out about market trends.

Traders are categorised in the financial market as being either amateur or professional and this is dependent on the amount of time and effort spend on trading. The more strategic the trader, the better the likelihood of getting returns.

If you are new to share dealing, it is worth making an appointment with an independent financial advisor to gage your levels of suitability to this type of trade. They will also be able to advise how much you can afford to invest.

Important Note:

Which Way To Pay is an independent online comparison website. Please be aware that while part of our website content involves the review and comparison of a wide range of financial products, we do not in any way recommend or encourage consumers to begin a share transaction or to enter trade on any index, commodity, currency, stock or share. Please ensure you that are fully aware of the product before you begin transactions on shares trading.

Which Way To Pay, while using reasonable measures to ensure that data on the website is accurate, is not aware of your personal investment aims, objectives or needs. Site content is designed for information and interest only.

We would encourage that if you are unsure as to your suitability for shares dealing or trading, you seek independent financial advice.

The risks outlined here have been just some of those involved in shares trading or dealing. While there are many positive sides to this type of trading, it is nevertheless important to realise what the risks are when dealing with such an exciting and potentially rewarding financial product. Once you are prepared it is up to you whether you employ shares dealing or trading sensibly or without care or forethought.

        


Please Note: www.whichwaytopay.com is not authorised to give advice under the Financial Services and Markets Act 2000.

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