Diversifying your risk in the stock market

Investments in the stock markets usually give much higher returns than any other form of investments. But it is also associated with higher potential risk than any other type of investments. That is why you need to be prudent while investing in the stock market. If you follow some simple rules, you can minimize the risk and can still enjoy good return from the stock market.

1. Diversify your portfolio: As they say, do not put all your eggs in one basket! Spread your investment amounts across many different and diverse sectors (like banking, oil & gas, FMCG, Real Estate, IT etc.). It is not very wise to invest the entire amount in one particular sector, even if that sector is performing brilliantly at present. If you do so, you are at a higher risk if that particular sector gets a hit tomorrow. Invest higher amounts in the sector which are performing well today, but invest in others, too; specially to the sectors which have a rising potential in future. Your portfolio should not be too biased to one or two sectors.

2. Invest in Blue chips: Investing in branded, large blue chip companies is a relatively safer option than investing in little known penny stocks. Blue chip companies generally have a transparent and healthy audit book, past results to check, a brand name to trust. Pick up some blue chips which are performing well over past few years and invest in them medium to long term; you are almost assured to get good returns. Investing in penny stocks, on the other hand, some times can get you much higher returns than the blue chips. But it is not easy to identify those golden penny stocks. Unless you are a seasoned player in the stock market or have some "insider's information", investing in penny stocks can be quite risky; more often than not, it is a gamble.

3. Do not go by the "news" or rumors: It is your hard earned money, so invest it prudently. Do not jump on to invest in certain stock just because there is some news that that stock will sky rocket in near future. This is outright gambling. Try to get as much information about the stock as you can before investing in it. Look at the past performances, audit books of the previous years. Evaluate the prospect of the sector to which the stock belongs. See the P/E (Profit to Earning) ratio; it is not wise to buy a stock which is already selling at high premium. In short, invest your money judiciously.

4. Keep yourself up to date: Keep

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