Governance, Risk & Compliance

Governance, Risk & Compliance

January 06, 2016

The Many Faces of Financial Risk Management

Stocks are like living creatures – they require active engagement and care. You can’t simply buy stocks and expect results. Rather, as accomplished penny stock trader Timothy Sykes notes, a good investor is disciplined, a hard worker who is willing to invest not just money but time into the process. These disciplined investors are masters of financial risk management.

Financial risk management takes many forms, but when it comes to penny stocks, there are a few key concerns. In particular, penny stocks can be more volatile than more established stocks, with prices rising and falling more rapidly and in ways that impact the overall value of the stock to a greater degree. This scares some investors, but there’s no need to fear every penny stock, especially if you do your due diligence.

Demand Tech Compliance

If you want to get involved in the penny stock trade, you can go through a few different routes. Some beginning traders prefer to work specifically with brokers who can help guide them through the investment process, but others prefer to trade online. When trading online, there are a few things you should look for to manage your overall risk, and most of the have to do with technological security compliance.

Tech security compliance is focused on providing the kinds of protection that will keep your information safe. This includes trading over a secure connection, having strong password requirements, and defined encryption practices. With the num  ber of sensitive information breaches we’ve seen in recent years, tech compliance should be of the utmost concern when thinking about financial risk management.

Focus On Active Management

It’s easy to forget about your trading accounts - performing a trade, keeping up with it briefly, and then leaving it all to do whatever it is penny stocks do. This is a terrible strategy when it comes to handling your financial risk. Rather, you need to pay attention to the activity in your trading accounts at all times. Even if you’re not actively trading, you should be checking in – looking at stock prices, looking at what’s in your account, and making sure nothing has changed without your knowledge.

Unfortunately, active management is especially important when it comes to handling penny stocks – and really all stocks – because of the number of fraud cases we see. Brokers are not always honest and there are cases of brokers stealing money from investors, something that can go undetected if you aren’t actively monitoring your accounts. Keep good records and make sure that you aren’t seeing unauthorized account changes.

Make A Plan

One way to handle the financial risk inherent in penny stock trading is to have a clearly established plan for what you want your portfolio to look like. At what point do you want to sell? What kind of outcomes would cause you to invest more or shift your investments? Having a plan based on thorough research will prevent you from acting on a whim or based on company hype. Overexcitement is a core cause of excessive investment risk.

Approach With Caution

Penny stocks are marred by get rich quick schemes, but they aren’t all risk and no reward. Rather, when approached with caution, a plan, and an understanding that stocks don’t simply improve endlessly and without monitoring, you can set yourself up for success. But risk will always be part of the picture, and it should be acknowledged as such. Invest carefully, proceed responsibly, and you can find success.

Edited by Stefania Viscusi

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