Tolerance is the key to success, you may have heard it often before. A senior financial analyst at Wilkins Finance confirms that with trading comes risk and often, people lose the ability to tolerate and sell their stock before it gets mature.
Understand “risk tolerance”
First of all, we must know that what does this term refers to. Basically, risk tolerance is standing with the fluctuations that occur in the trends of investment. This is a very important factor when investing in the stock market. You need to understand that if you are taking a risk that is too large, the end-result could be very bad. If you lack sufficient tolerance for risk, you might have an unexpected loss.
How to break down risk tolerance
You must know how much risk you can tolerate. For this, you can get help from questionnaires that are based on risk tolerance. In this way, you may assess how many levels of risk is possible for you to bear. However, there are other ways to determine this such as going through the cases that had occurred in the past when trading had tested your sanity. This prepares you for the worst situation that can come your way while risk trading.
Types of risk tolerance
The human being is an unpredictable machine and you can never judge one on the basis of the traits that another one possesses. There are several types of risk takers. Each type varies in condition and each risk has different values.
Aggressive risk tolerance
Very few people are aggressive risk-tolerant humans. They purchase highly volatile stocks which may give them an unexpected gain or a great loss. These types of risk-takers are market savvy. They invest in such stocks which are highly risky in both profit and loss means.
Moderate risk tolerance
Moderate risk-tolerant people are those who keep a balance in investment risk. They understand the trends; they go through the past graphs and invest in something that is not too risky. They invest half of their belongings into volatile stock and half in stocks that are perfectly expected to grow in future. The reason they follow this strategy is that they cannot bear a high level of aggressive risk. They keep on the safe side by keeping some stocks of trendy nature.
Conservative risk tolerance
There is the group of people that often includes the old aged, retired squad. These people are never likely to accept risk into their portfolio. They have been working for many years and at this age, they are not willing to take on the stress of investment. They play safe for a lesser return. They keep waiting patiently after making their investments. They choose only those stocks to invest in, which are most likely to grow sooner or later. They do not care about the time cost as they make these investments only to live on the income they get from the return of their investments.
The difference between risk tolerance and risk perception
Anything that is written in words or on paper is totally or partly different from reality. When we talk about the perception of risk, we may find many youngsters who are taking it as an adventure. On the basis of past history, they develop their concept of risk tolerance and think that if they come across such situation, they won’t be defeated.
When it comes to practical life and experience, many of those who claimed to be perfectly ready for the risk fail to prove they have a good tolerance for risk. Often, the market is unpredictable and they are unable to understand what is going on. They feel a great difference in reality and perception. Some of them succeed in tolerating while others fail to do so.
Trading is all about taking risk. It is a common saying for traders – the higher the risk, the higher the return. Those who take great risks achieve higher returns as compared to those who avoid taking the risk. You might also use stimulation to assess how much risk you are able to bear.
In the game of investment, risk is a building block. Little or much, you cannot avoid or eliminate this factor. If you are ready to compromise on the returns, then you may invest in less risky stocks.