Over history, risk has been an inextricable aspect of all sorts of commerce and investment. When one thinks of investing in the share market in UAE, the certainty of risks always pertains. Whether it was the chance of loss due to harvest failures, wars, or the loss of commercial ships, traders had to deal with risk in all of their interactions later on. As a result, they devised risk management techniques. These were mostly informal attempts in the beginning.
Risk management is the process of analysing prospective losses from investments made by investors and taking any necessary steps to reduce the likelihood of such losses occurring. Risk management is becoming an integral aspect of the trading tactics utilised by investors.
Importance of Risk Management in Share Market in UAE
Risk and reward are inextricably linked in the share market. In general, the higher the risk, the higher the profit. Risk management, in financial terms, is the act of recognising and analysing risk, as well as establishing ways to manage and limit it while optimising profits.
Every investment entails some level of danger, and for an investor to accept this risk, he must be well paid. The risk premium, or simply the premium, is the method through which this compensation is provided. Because there can be no rewards without risk, the risk is important to the share market in UAE. Share market risk management tactics are used by successful investors to reduce risk and enhance reward.
Types of Risks in Share Market in UAE
In the share market in UAE, there are typically two categories of risk: market risk and inflation risk. Market risk arises from the likelihood of financial markets increasing or decreasing in value. Inflation, also known as the purchasing power risk, is caused by the increase and decrease of prices of goods and services over time.
In long-term investments, inflation risk is crucial, but in short-term investments, market risk is more important. Market risk may be handled and controlled to a degree, but inflation risk cannot be managed or controlled.
Risk Management Strategies in Share Market in UAE
1. Follow Market Trends
Most investors assume that investing against market trends would result in bigger profits. Following the trend, on the other hand, is one of the most essential share market tactics for reducing investment risk. Because the share market in UAE is dynamic and continually changing, identifying the trend is challenging with this technique. It’s tough to recognise short-term patterns over a longer period.
2. Avoid hasty decisions
With every slight change in the price of their assets, some investors make hurried and rash judgments. Another share market in UAE advice that investors overlook is the need of conducting thorough research and due diligence before making share market investment selections. Before investing, investors should determine their financial objectives and focus on both short- and long-term goals to get the most out of their share market investments.
3. Plan before Trading
When it comes to stock investment in the share market in UAE, pre-planning might be the difference between success and failure. Stop-loss and take-profit levels are helpful tools to utilise when planning transactions. Successful investors set the entry and exit price levels in advance to evaluate the potential profits based on the likelihood of the shares achieving these levels.
Unsuccessful traders, on the other hand, make investments without thinking about the prices at which they would purchase and sell financial assets. They frequently trade emotionally or impulsively, they cling on to their bets even when the price falls in the hopes of a reversal, and they neglect to book gains when the price increases to make more money.
4. Stop-Loss Price in the share market in UAE
This is the cheapest price at which the investor is ready to sell in order to avoid additional losses. When the market does not move in the direction that the investor expects, a stop-loss point might be advantageous. It’s useful for avoiding the ‘price will come back’ mindset and minimising investment losses. A stop-loss order may be beneficial to almost all investors. A stop-loss order is used to restrict an investor’s loss on an adverse move in a security investment.
You don’t have to check your holdings daily if you use a stop-loss order. A downside is that a short-term price change might cause the stop to activate, resulting in a needless sale.
5. Take-Profit Price
This is the amount at which the trader is interested in selling his share and taking a profit. When the probability of more price increases is high, this point is advantageous for reducing risks in the share market in UAE. After substantial gains, investors book profits on equities that are approaching their resistance levels, ensuring that they sell before the market consolidates and prices begin to fall.
The share market is volatile, and skilled investors use risk management measures to reduce their exposure. Investors may increase earnings from stock investing if they apply various risk reduction methods carefully and promptly.