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How to find a stock market strategy that suits you

by , 26 May 2014

When it comes to putting any money into the stock market, the first thing you need to look at is the type of investor you are. If you're very conservative, then trading single stock futures probably isn't for you. So how can you work out what type of investor you are? And once you know your ‘investor type,' what financial instruments suit you best? Read on to find out…

The stock market all comes down to the relationship between risk and reward

Generally speaking, the higher the risk of a financial instrument, the higher the potential return. But high-risk trading isn’t everyone’s cup of tea.

Have a look at the chart below. It shows the risk reward relationship of different financial instruments…
 
Chart of risk reward relationship of financial instruments

By knowing what type of investor you are, you’ll have a better idea of what investment area to focus on. Here are the four main investor types and what financial instruments suit you best…

Investor type 1: Timid

You’re very risk averse, Gareth Stokes in Fear, Greed and the Stock Market explains. You’re more likely to keep your cash in the bank than risk it on the stock market. If this is you, you need to ensure your money in the bank is at least keeping up with inflation, or you’re losing money.

As a timid investor, you won’t really have a stock market strategy as you’re interested in keeping your money only in cash.

Investor type 2: Cautious

You like to avoid risk. You’re probably wary of investing directly on the stock market. Your stock market strategy will most probably involve financial instruments like unit trusts.

By following this stock market strategy, you should at least see your returns beating inflation.

Investor type 3: Shrewd

You’re comfortable investing on the stock market. You’ll look for financial instruments that give you reasonable returns. Your stock market strategy may involve investments in bonds, shares, unit trusts and exchange traded funds (ETFs).

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Investor type 4: Adventurous

Trading in geared financial instruments will suit you. You have a good tolerance for risk and are always on the look out to make short-term gains.

Your stock market strategy will involve trading in financial instruments like futures and warrants. But you need to ensure that you manage your risks or you could face big losses.

So there you have it, how to find a stock market strategy that suits you.



How to find a stock market strategy that suits you
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