How to Minimize Risks in investment

In Today's dynamic economy, a great number of individuals want to use their money to generate income or profit by investing into different activities. But most of these people do not know how to invest wisely; as a result they lose their hard earned money badly.

As every investment involves risk, it is important to learn techniques and strategies that minimize the risk associated with investment. The most effective way of minimizing the risk is diversification. Diversification involves spreading your portfolio over well researched investment opportunities.

There are different ways to diversify your portfolio: Diversify among asset class, Diversify globally, diversify by sector and Diversify by style.

Here is how to diversify your portfolio among three asset classes:

1.Investing in Stock Markets

Stock market involves buying shares in a particular company. When you buy a share, you become a share holder of the company. If the company gets high earning, you receive cash dividends proportional to your initial investment. If the company suffers loses during a year, you may not receive any profit. At the same time, if the company decides to expand its business with its profit, there is a possibility that you may not get your profit for that period.

The best way to invest in stock markets is through Brokerage Company. You pay the purchase of the shares and the commission for the broker's services. Brokers can also sell your stock shares if you are willing to sell your stock.

You can earn large profits over a long period of time. But it involves a risk. Stock values change continually and often very large. As a result you do not have assurance that you will get back your initial investment. A business recession or poor company management may reduce the company earning power. As a result people may not show interest to buy stocks from the company. At this moment, your share value may drop, and if you decide to sell your stock there is a probability of lose.

One way of minimizing risk is buying combination of stocks from different industries. Always avoid investing in single stock.

2.Bonds

Bonds are less volatile as compared to stocks, mostly they provide regular income. If your are more concerned with safety of your investment, it is recommended to allocate more of your portfolio towards US government or insured bond investment rather than stocks.

3.Short Term investment

Short term investment includes money market accounts and Certificate of Deposit. Compared to Stock markets and bonds, they yield small profits. They may also provide little protection against rapid inflation. But these kinds of investments usually offer insured principal.

To summarize, to minimize the risks associated with investment, you should always diversify your portfolio over well researched asset class. It is also important to diversify with in each asset class. Be advised that: the safest investments with the lowest returns are government bonds and certificate of deposits.

by John David