Limiting Your Risk

The stock market, to me, is the arena of the Capitalist Gods. It’s a place of financial battle that one might enter without risk of destroying anyone else for personal gain. Yes, I do understand that for each win, there is a subsequent loss. The thing about the stock market losses is that to earn a loss, one must gamble. I don’t feel it’s my duty to protect a gambler from losing. It’s up to him to decide not to gamble in the first place.

Now, for me, I don’t invest a lot. Whenever I hear people talk about investing in small amounts it’s $1,000 here, $5,000 there. I’m about 1/100th of that. I tend to invest about $50 at a time, which, I’m sure you can see, costs a lot in commissions. Now, I’ve come up with a few ways of covering these costs, and limiting my risk as I do so.

Invest In Dividend Stocks

This has been lauded for years as the best way for long term investors. I’ve found, though, that dividend paying stocks can help limit the risk of your entire portfolio. When I designed the spreadsheet for my portfolio, I designed it with many, many, different formulas. It breaks down the portfolio-wide profit / loss, but also on a stock-by-stock basis. Now, by using a dividend reinvestment plan through my broker, which is a $0 commission, I can limit not only the commission, but the stock price. I don’t consider dividend purchased shares as a cost so when I insert them into my portfolio, I give them a $0 price, and a $0 commission. This essentially lowers the average-price-per-share, as well as the average-commission-per-share price.

Diversification

Now, the dividend plan I detailed above works well for a single stock, but you really don’t see the benefits until you’ve added numerous stocks, different types of industries, both dividend paying and non-dividend paying, quarterly, monthly, you get the picture. The trick to the dividend plan is that should you lose in one stock, the dividends can help balance out the loss of the entire portfolio. For instance, currently I’ve purchased and sold two stocks. One, a small $5 dividend paying stock, of which I purchased 60+ shares over time. The other I owned just two shares of, at a cost of nearly $31 per share. The larger I sold at a loss. This loss was $10.45. Life events happen, and you cannot always wait for the market to correct. But, I had already sold my other stock for a profit of $13.79, giving my entire portfolio a profit of just over $3. Now, take into account that I sold both of these stocks for less than the price I paid for them. Yes, both stocks had lost value in the time I owned them, down below the original price I paid, but due to the dividends on the first, the entire portfolio had a profit.

Invest What You Can

Yes, I tend to invest about $50 at a time. That’s because that’s what I have to invest. I’m not rich, by any means, just ambitious and intelligent. That said, I’m not opposed to investing more when I have it. For instance, when selling off one stock, I will generally invest the profits in a single purchase, to limit the cost of my commission.

Know Your Options

In the broker I use there are many ways to invest. Knowing my options is the only way to limit my cost. For instance, I can make manual purchases, but I can also be patient and allow the auto-investment system to invest for me. Doing so lowers my commission by $2 per stock.

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3 thoughts on “Limiting Your Risk

  1. Pingback: A Bit More Detail On Why I Calculate Dividend Stocks Like I Do | Capitalist Cares

  2. Pingback: Frequent Trading VS. Pre-planned Investing | Capitalist Cares

  3. Pingback: Expansion on 3 Months To Profit [With Formula] | Capitalist Cares

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