Stock investment, with its unique allure, attracts countless investors. It's a double-edged sword, offering the potential for high and enticing returns while also carrying unignorable risks.

The stock market has witnessed numerous wealth-growth stories. After the 2008 financial crisis, the US stock market experienced a substantial rally in the following decade. The S&P 500 index repeatedly hit new highs, allowing many investors to reap significant profits. These success stories have shown the potential for rapid wealth growth through stock investment, inspiring more people to dive into the stock market.

However, stock investment comes with non - negligible risks. In early 2020, the outbreak of the COVID-19 pandemic dealt a huge blow to global stock markets. Stock prices plummeted in a short time, with many stocks losing half or more of their value. Take stocks in industries like aviation and tourism as examples. Due to travel restrictions and a sharp drop in demand caused by the pandemic, airline stocks were severely hit.

Even in normal market conditions, stock prices can fluctuate significantly due to various factors, such as companies failing to meet earnings expectations, increased industry competition, and macroeconomic policy adjustments. These factors can all lead to stock price declines, putting investors at risk of asset shrinkage.

Because of the high-risk, high-return nature of stock investment, risk management is of utmost importance.

Investment risks can be effectively managed through various techniques. These aim to mitigate potential losses while enhancing the overall performance of the investment portfolio. By understanding and applying these strategies, investors can make informed decisions that align with their financial goals and risk tolerance.

Investors can set a predetermined price at which an asset will be automatically sold to limit potential losses. This tool is particularly useful for novice investors, as it provides a safety net against significant declines in an investment's value, preventing deeper losses. It is an automated risk control mechanism.

How to Set Stop-Loss Orders Reasonably？

Based on Technical Analysis

Technical analysis is a common approach. Investors can determine stop-loss levels by observing stock price trends, chart patterns, and technical indicators. For instance, if a stock has been trading in an uptrend and the 50-day moving average has served as a reliable support level in the past. If the stock price drops below this 50-day moving average, it may indicate a weakening of the short-term uptrend, and investors might consider setting a stop-loss order at this point. The support level is a crucial reference. When a stock price rises to a certain extent, it often encounters resistance and drops back near a particular price point. Conversely, when the price falls, it may find support and rebound around a corresponding price level. If the stock price breaks below an important support level, it could signal a trend reversal, making it reasonable to set a stop-loss order. The moving average is also a frequently used indicator. If the stock price drops below the short-term or long-term moving average, it may indicate a weakening of the short-term or long-term trend respectively. Investors can set stop-losses referring to moving averages according to their investment cycles and risk preferences. This method is objective and scientific, yet not entirely accurate. It can be easily misjudged due to various factors and poses a challenge to beginners.

Based on Capital Management

Setting stop-loss orders according to the proportion of bearable losses is a simple and effective capital management method. Investors first determine the maximum loss proportion they can tolerate for each trade, generally recommended to be controlled within 1% - 5% of the total capital. The advantage is that it can strictly control risks and help maintain a good mindset. However, in special market conditions, it may lead to relatively significant losses compared to a more nuanced stop-loss strategy, especially when the market is highly volatile or when a stock has a sudden unexpected price movement and is rather mechanical, without fully considering stock trends and market conditions. In actual operation, the two methods can be combined. First, determine a rough stop-loss range based on technical analysis, and then determine the specific stop-loss level in combination with the capital management strategy.

Diversification is one of the most fundamental strategies for managing investment risk. It involves spreading investments across various asset classes, sectors, and geographical regions to reduce exposure to any single source of risk. By holding a diverse portfolio, investors can cushion the impact of adverse market movements in any one area, thereby increasing the likelihood of achieving their financial objectives.

Specific Ways of Diversified Investment

Diversification of Asset Classes

When constructing an investment portfolio, asset classes should be diversified. Investors should not only invest in stocks but also allocate assets to bonds, funds, gold, etc.” Bonds, characterized by relatively stable returns and low risks, have a low correlation with stocks. During periods of high market volatility, the stability of bonds can effectively mitigate the risks associated with stock investments. Funds, through the method of pooled investment, gather the funds of numerous investors and are managed by professional fund managers, investing in a variety of assets, achieving further diversification. Gold, as a safe-haven asset, often plays an important role in preserving value during economic instability and rising inflation.

Generally, for investors with a low-risk tolerance, the proportion of low-risk assets such as bonds and money market funds can be increased, with a relatively small proportion of stocks and equity funds, and an appropriate allocation of gold. For investors with high-risk tolerance, the investment in stocks and equity funds can account for the majority, and the proportion of low-risk assets such as bonds should be reduced accordingly.

Diversification of Industries

In stock investment, avoid over-concentration in industries. Different industries perform differently in the economic cycle. During an economic boom, industries such as consumer goods and technology usually perform remarkably. The consumer goods industry benefits from the improvement of residents' consumption power and the trend of consumption upgrading. Product demand is strong, and corporate performance grows steadily. The technology industry, characterized by continuous innovation and technological breakthroughs, explores new markets and application areas, driving stock prices to rise steadily. During an economic recession, industries such as pharmaceuticals and utilities are relatively more stable. The pharmaceutical industry is related to people's lives and health, with strong demand rigidity, and is less affected by the economic cycle. Utility industries such as power, water supply, and gas supply provide basic public services to society, with monopolistic and stable characteristics, and relatively stable performance. Investors can invest in stocks of multiple industries such as technology, healthcare, finance, consumer goods, and energy simultaneously. The investment proportion for each industry can be determined based on the industry's development prospects, market valuation, and one's research and judgment.

Geographic Diversification

Investors should not confine their investments to the domestic market. Instead, they should look globally and consider investing in stocks of different countries and regions. Economies, policies, and market maturities vary across regions, leading to different stock market performances. When the domestic economy slows down and the market undergoes adjustments, other countries or regions may be in an economic upswing with a booming stock market. However, factors like exchange rates, politics, and cultural differences need to be considered when making overseas allocations.

Company Diversification

When choosing stocks, diversify across multiple companies and avoid over-concentration in just a few. Even within the same industry, companies vary in terms of their operational efficiency, financial status, and market competitiveness. By investing in multiple companies, investors can reduce the impact of a significant share price drop of a single company, which may be caused by poor management, financial fraud, or industry competition, on the investment portfolio. Generally, it is recommended that the investment proportion in a single stock does not exceed 10%. This way, over-concentration in a few stocks is avoided. As companies within the same industry vary in various aspects, diversifying across multiple companies helps mitigate risks associated with individual companies.

Temporal Diversification

Investors should avoid investing all their funds at once. Instead, they can use dollar-cost averaging (investing a fixed amount regularly) or invest in stages. Dollar-cost averaging can smooth out costs and reduce the risk of incurring high purchase costs due to market fluctuations. Staged investment, based on the market situation and investment goals, involves investing funds in parts at different time points. This helps avoid losses from poor market timing and improves the stability and profitability of investments.

Precautions for Diversified Investment

Diversified investment is an effective risk-management strategy. However, it is not true that the more diversified the portfolio is, the better.

Over - diversification can prevent the investment portfolio from fully capitalizing on the advantages of assets, leading to reduced returns and increased management difficulties and costs. When diversifying their portfolios, investors should determine a reasonable degree of diversification based on their risk tolerance, investment goals, and time horizon. For example, investors with low-risk tolerance and a goal of capital preservation and appreciation can adopt a more conservative investment portfolio with lower diversification. Those with high-risk tolerance and pursuit of high returns can appropriately increase the proportion of risky assets while maintaining a reasonable level of diversification. Moreover, investors should pay attention to the correlation among investment targets and select assets or stocks with low correlation. Investors can judge the correlation by analyzing historical trends, correlation coefficients, and other indicators and construct low-correlation combinations when building an investment portfolio.

Diversified investment is a dynamic process. Investors need to regularly evaluate and adjust their investment portfolios. Adjust the proportion of various assets or stocks promptly according to market trends, economic conditions, and other factors. Pay attention to fundamental changes, eliminate poor investment targets, and replace them with potential assets or stocks.

Risk management in stock investment is a continuous process of learning and practice. Investors need to constantly accumulate experience, conduct in-depth research on the market and investment targets, and flexibly apply risk-management techniques such as stop-loss orders and diversified investment according to their own risk tolerance, investment goals, and market conditions to develop an investment strategy suitable for themselves.

Hedging strategies play a crucial role in controlling risks in stock investment, effectively mitigating the impact of market fluctuations. Derivatives such as options and futures are commonly used to hedge investment risks.

• Futures Hedging

Futures hedging is a strategy that utilizes the futures market to balance the risks of stock spot positions. By establishing positions in the futures market that are opposite to those in the stock market, investors can hedge against the risks to their stock investment portfolios caused by factors like market fluctuations, aiming to reduce losses. For instance, if an investor holds stock spot positions or anticipates holding stocks soon and is concerned about the shrinkage of asset value due to a potential decline in stock market prices, they can sell corresponding futures contracts in the futures market. If the market indeed drops, the value of the stock portfolio will decrease, but the short position in stock index futures will generate profits, offsetting each other and thus controlling the investor's losses. Correspondingly, when an investor plans to buy stocks at a certain time in the future but is worried about the increase in costs due to a potential rise in stock prices, they can first buy corresponding futures contracts in the futures market to hedge against the increased costs.

• Options Hedging

Options hedging strategies are more flexible. When an investor holds stocks and is concerned about a potential decline, they can pay the option premium to buy a put option. If the stock price does fall, the value of the put option will increase, and its gains can offset the losses of the stocks. Selling a call option is another approach. When the stock price experiences a limited rise, the investor can earn the option premium income. However, this method also restricts the potential upside gains of the stocks. Nevertheless, options hedging has some drawbacks. The value of an option decays over time. If the market trend doesn't meet expectations, the value of the option may drop significantly. At the same time, for the seller of an option, there is a relatively high exercise risk. If the option is exercised, they may need to buy or sell a large number of stocks at the strike price, which may lead to significant financial pressure or asset losses.

• Arbitrage Hedging

The arbitrage hedging strategy takes advantage of the price differences in the market to obtain profits while reducing risks. Common types include cross-market arbitrage and cross-product arbitrage. Cross-market arbitrage involves taking advantage of the price differences of the same stock in different markets. Different stock markets may exhibit price differences stemming from factors like market demand disparities. Investors can buy stocks in the market with relatively lower prices and sell them in the market with relatively higher prices to earn the price difference. Cross-product arbitrage, on the other hand, is based on the price relationship between related stocks. For example, when the price of gold surges while the price of silver lags behind, and the price relationship between them deviates from the normal range, investors can buy silver-related stocks and sell gold-related stocks, and make profits when the price relationship returns to normal.