Stock markets,though have the potential to produce greater returns than other asset classes,are associated with high risk.In fact, higher the risk higher is the return or vice-versa.So it becomes imperative to understand that you know the risk before entering the markets. Every individual has his own risk taking capacity or Risk Profile when it comes to his trading or investment decisions.So what are the factors that define your Risk Profile?Let’s take a look ;
1.Knowledge :- It is said that Knowledge leads to Confidence and Confidence leads to Success.If you know what you are doing and how it is to be done then half the battle is won.Learn as much as you can by reading the literature about trading and investing.Working in stock markets is an ever learning process.When you have knowledge, you know the how much risk to take and how to manage it accordingly in different situations.Ultimately, Knowledge is Power.
2.Savings:-Do you enough savings to take care of your needs in case of any undesired financial situation? If the answer is No,you should seriously look at this aspect.Everyone of us can fall into a situation of financial emergency like unfortunate job loss,any illness or accident when we need cash urgently. So make some investments into risk free instruments and most importantly create an Emergency Fund.Emergency Fund is the cash which is always available to you if the need arises.General rule of thumb is that you should have at least six times of your monthly income as your Emergency Fund.After doing all these necessary requirements, you can look for trading with the left behind cash.
3.Age:-Your age is also an important factor in determining your risk profile. At young age,you may want to take some risk to earn higher return.This is because at young age you may not have responsibilities of family or married life and also you can give more time to your trade or investment to recoup the loss in case you are in a loss in your investment.In older age when you are nearing your retirement, you would not want to risk your money because your regular income is going to be stopped after retirement.