Financial markets allow you to buy and sell assets like equity in share markets, currencies, bonds, derivatives and many more. Before starting investing, what should you consider?

What is your risk tolerance?

Risk tolerance refers to your willingness and ability to withstand potential losses or fluctuations in the value of their investments. It is a personal assessment of how comfortable you are with taking on risk in pursuit of potential investment returns.

Investors can be categorized into three levels of risk tolerance: conservative, moderate, and aggressive. To determine your risk tolerance level, you can take into account the following factors:

• Financial goals: Evaluate your financial objectives, such as capital preservation, income generation, or long-term growth. Determine the importance and urgency of achieving these goals, as it can influence your risk tolerance.
• Time horizon: Having longer time horizons typically enables a higher risk tolerance as it allows for more opportunities to recover from potential losses.
• Knowledge and experience: If you have a good understanding of the market and investing principles, you may be more willing to take on higher-risk investments.
• Emotional temperament: Assess your emotional reactions to market volatility and potential losses. If you experience feelings of anxiety or stress during market downturns, it is an indication of potentially having a lower risk tolerance.

Once you have determined your risk tolerance level, you can align your investment strategy accordingly. Conservative investors may opt for lower-risk investments such as bonds or stable dividend-paying stocks, while aggressive investors may be comfortable with higher-risk investments such as penny stocks or emerging market securities.

What is diversification?

As the saying goes, “don’t put all your eggs in one basket”. Diversification is an investment strategy that involves spreading your investment portfolio across different asset classes, sectors, industries, geographic regions, or types of investments. The goal of diversification is to reduce risk by allocating investments in a way that minimizes the impact of any single investment’s performance on the overall portfolio.

The principle behind diversification is that different investments react differently to various market conditions. By diversifying, you can potentially offset losses in one investment with gains in another, thereby reducing the overall volatility of your portfolio.

Who can you trust?

Trust is essential. You want to make sure that your broker is trustworthy and has a strong track record; after all it’s your money.

In the United Kingdom, it is advisable to choose stockbrokers who are authorized and regulated by the Financial Conduct Authority (FCA). The FCA serves as the regulatory authority responsible for supervising and regulating financial services firms operating in the UK. A FCA-regulated broker protects its clients to FCA’s strict criteria.

After opening a demo account with your broker, you can test your strategies, plans and skills risk-free. Once you want to do it for real, create a live account then. Never rush into the markets unless you get ready. And don’t forget: practice makes perfect.