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In this article, we take a closer look at how professionals manage risk through hedging and how they increase output with leverage. This is a beginner guide.

The stock market is not always a safe place. Sure, it’s seemingly safe on the outside, but it is quickly becoming a dangerous realm where you risk losing everything if you make the wrong decision. You could end up buying stocks that plummet in value as we all saw happen with J.C Penney’s stock. 

The best way to get around this is by trading on the long side of an entity and sometimes using leverage to amplify profits when a favorable opportunity arises. Learn how to do this and what other leverage strategies work best in our latest blog article!

The Difference Between Speculating and Hedging

There are two main types of trading: hedging and speculating. Speculating is when you trade with the intention of making a profit from price movements. Hedging is when you trade to protect yourself from price movements.

Most traders are speculators. They take positions in the market with the hope that prices will move in their favor so they can make a profit. However, hedgers are not interested in making a profit from price movements. Instead, they trade to protect themselves from price movements.

The best way to think about hedging is like insurance. You pay a premium to insure yourself against an adverse event. If the event happens, you receive compensation that covers your losses. If the event doesn’t happen, you lose the premium you paid for the insurance.

Hedging, on the other hand, is similar, but it’s a very defensive approach to investing. You take a position in the market that offsets your exposure to an adverse price movement in order to prevent loss. If prices move against you, your hedged position will offset some or all of your losses. If prices don’t move against you, you will still incur a small loss from the hedge itself.

The key difference between hedging and speculating is that hedgers are not trying to profit from price movements. The best time to hedge your portfolio is when you are heavily long in stocks and equities and you don’t want to close your positions while the volatility increases.

Trading Stocks, Indices, and Commodities

When it comes to trading, there are a variety of strategies that can be employed in order to generate profits. One such strategy is leveraged trading, which involves using a small amount of capital to control a large sum of capital. This can be an effective way to make money, but it also carries with it a high degree of risk. In order to be successful with this strategy, it is important to have a solid understanding of the markets and the underlying assets that are being traded. Additionally, it is important to have a system in place to manage risk and protect profits.

Strategies for Traders to Watch for

When it comes to speculating with leverage, there are a few strategies that traders should keep an eye out for. These include:

1) Breakout strategy. This is where traders look for stocks that are about to break out of a tight trading range. Once the stock breaks out, they will enter into a trade and ride the momentum.

2) Trend following strategy. This is where traders will enter into trades with the trend. They will look for stocks that are in an uptrend or downtrend and then ride that trend.

3) Contrarian strategy. This is where traders will do the opposite of what everyone else is doing. So, if everyone is buying, they will sell. If everyone is selling, they will buy. Short-selling is a good approach if your outlook is contrary to what everyone else sees.

4) Scalping strategy. This is where traders will look for small movements in the market and try to make a quick profit off of them.

5) Day trading strategy. This is where traders will hold their positions for a short period of time and then exit before the end of the day.

Risk Factors

Most readers probably think that leverage trading is all about making quick and profitable trades. However, there is another side to this coin – the risk factor.

Just as leverage can magnify your profits, it can also amplify your losses. This is why it’s important to have a solid risk management strategy in place before you start speculating with leverage.

The main factor that contributes to losses is the overall position size. When you use leverage you are able to trade much larger sizes with only a fraction of your own margin capital. This tends to overwhelm new traders and overleveraging is very common.

When you add volatility to the mix it can become very difficult to control your position, especially if you don’t use protective stops or proper risk management tools such as negative balance protection and isolated margin accounts.

Things to keep in mind when speculating with leverage

1. Use stop-loss orders: A stop-loss order is an order to sell a security when it reaches a certain price, and is used to limit losses on a position. For example, if you buy a stock at $100 and place a stop-loss order at $95, you will sell the stock automatically if it falls to $95 or below.

2. Calculate your leverage: It’s crucial that you calculate the leverage before you enter any kind of setup to be fully aware of how much you are risking per trade and how big of a position you can afford to open. Use a leverage calculator to perfectly select the ratio that best fits your setup. 

3. Manage your position size: Position size is the number of shares or contracts you take on in a single trade. When trading with leverage, it’s important to keep your position size small relative to the size of your account. This will help you avoid getting margin calls (a demand from your broker for more collateral) and protect your capital if the trade goes against

Final words

The financial markets have always been a mystery to beginner investors and it might seem like a daunting task to take on high volatility stocks and commodities. While this is true, there are a couple of basic principles that you should know about before you start that will help you to amplify your profits and secure your downside. In this article, we take a closer look at some speculative approaches and hedging.

Source:  ArticlesFactory.com

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With the propensity to compound your wealth over time, a SIP can gradually grow your wealth, aligned with your regular growth in income. Thus, over a long span, you get good returns, even if you invest small amounts initially. The fact is, your gains can be reinvested and you get the effect of compounding which is positive in terms of earning returns.

 Go ahead and ask the majority of investors what their goals are. Most will undoubtedly tell you that they want to become rich. As each generation comes and goes, the general consensus is that investors want to become, not only rich but rich quickly. This is, of course, easier said than done for most investors, but you can start investing early and earn good returns in the future. How? Through an efficient mode of investment called a systematic investment plan or a SIP.

According to the AMFI (Association of Mutual Funds India), mutual funds consist of around 5.5 crore SIP accounts currently (https://www.amfiindia.com/mutual-fund). Seasoned investors will tell you that a SIP is the simplest, no-nonsense way to generate returns over a period of time. If you wish to know how much of a return to expect in a fixed amount of time from a SIP, you can use an electronic online SIP return calculator to give you this information at a click.

Rather Invest Than Not Invest

In case you are new to the investment scenario, but know one thing for sure, that you would rather invest your money than spend it, or have it lie in a bank account, then it’s likely that a systematic investment plan will interest you. Especially if you have just begun your career journey, you may not have large sums to invest at the start. If you try to sign up for a mutual fund, you may have to dish out a large lump sum to start your investment. Not everyone has that kind of capital. If you wish to invest small sums of capital in a regular manner, you can go in for a SIP. With a SIP return calculator, you can find out the returns you may potentially make with a particular SIP.

Understand What a SIP Is

So now you have understood that you can invest small sums of money and earn returns with a SIP, but do you know what a SIP actually entails? You won’t know how to use a SIP return calculator if you do not know how a SIP works. Therefore, to start investing small sums to get good returns, you should first be clear as to how SIP works.

A systematic investment plan is a mode of investment offered by mutual fund houses, letting investors invest small amounts of money on a regular basis. Your capital is invested in a mutual fund of equities, but instead of investing a large sum at a single time, you can invest small amounts, as small as Rs. 500, regularly. The frequency of your investments could be weekly, monthly or quarterly, depending on the mutual fund you select. The beauty of a SIP is that it allows small investors to allocate small amounts, depending on what returns they wish to achieve. Furthermore, a SIP return calculator can help investors to decide how much to invest.

SIP Customisation

Besides the convenience that a SIP gives you in making small investments that suit your needs, you have the ability to customize your SIP, according to the returns you wish to get based on calculations using a SIP return calculator. Let’s say that you begin with the minimum amount of just Rs. 500 per month, that is Rs. 6,000 a year, you can easily distribute the amount and invest daily, weekly, fortnightly, monthly, and so on. This works to your advantage, depending on the funds you have at your disposal. Today, the majority of asset management companies permit customization to make life hassle-free for potential investors.

With all the facilities you have at your feet to make calculated sound decisions regarding investment, like using a SIP return calculator to decide your investment amount, you can even sign up for a step-up SIP. This is where true custom-made applications to a SIP come into the picture. Let’s say you have already started a SIP. You may have initially begun with a monthly contribution of Rs. 5,000 per month to your SIP. Now, let’s assume that your income has increased and you wish to invest more in your SIP. Can you do this? Yes, you can. It is possible for you to increase your SIP amount by 10% or 20% in the year following your initial investment.

Small Sums, Good Returns

If you invest small sums in a SIP, you still have the potential to earn good returns in the long run. If you have made a decision to start a SIP with a particular sum based on your findings in a SIP return calculator, you can expect fruitful gains due to the compounding power that a SIP gives you. In the past few years, SIPs have been generating returns amounting to 15%-18%. These returns, when reinvested in the SIP, have a compounding effect to earn you more in the future. While you use a SIP return calculator to gauge your returns, you may discover that increasing amounts of your SIP contributions can make your returns increase more.

The Advantages of Small SIPs

A SIP lets you build discipline in your investment habits and this gradually helps you to invest instead of spend. Here are some more clear advantages of investing small sums of money to earn large rewards in the long run:

●       You don’t have to time markets – When you invest in a SIP with a small amount, gradually building your investment, you do not have to frequently watch market increases and decreases. If you invest a large sum, like in a regular mutual fund, you may be apprehensive about your investment and constantly check market movements.

●       You get good returns with a SIP, especially if you have used a SIP return calculator to judge how much to invest initially. Investing in a SIP average out any expense ratio (which is a big part of regular mutual fund expenses). This means that SIPs save you money and you end up with higher returns.

●       You get to save tax so tax payments do not eat into your earnings. For instance, if you invest in an ELSS fund by way of a SIP, your investments are non-taxable up to 1.5 lakh per year (financial year) based on Section 80 C of the Indian Income Tax Act.

●       You get the advantage of rupee-cost averaging in a SIP. What this translates to is that the longer you remain invested in any SIP, the better the chances for higher gains.

SIPs Can be Powerful

With the propensity to compound your wealth over time, a SIP can gradually grow your wealth, aligned with your regular growth in income. Thus, over a long span, you get good returns, even if you invest small amounts initially. The fact is, your gains can be reinvested and you get the effect of compounding which is positive in terms of earning returns. 

Source: ArticlesFactory.com