What do you need to know before considering online trading?

Before opting for online trading, you must take into consideration a number of elements that will help you protect yourself against the risk of financial loss and grow your portfolio.

Build a personal financial roadmap

Before making any investment decision, take an honest look at your overall financial picture – especially if you’ve never made a financial plan before – to decide which online trading solutions are right for you.

The first step to successful investing is determining your goals and risk tolerance – either on your own or with the help of a financial professional. There is no guarantee that your investments will earn you money. But if you educate yourself about saving and investing and follow a smart plan, you should be able to gain financial security over the years and reap the benefits of managing your money.

Assess your comfort zone for risk taking

The reward for taking risk is the potential for greater investment returns. If you have a long-term financial goal, you are likely to make more money by investing prudently in higher risk asset classes, such as stocks or bonds, rather than limiting your investments to lower-risk assets, such as cash equivalents. On the other hand, investing only in cash investments may be appropriate for short-term financial goals. The main concern of people who invest in cash equivalents is inflation risk, which is the risk that inflation will overtake and erode returns over time.

Consider an appropriate mix of investments

By including in a portfolio asset classes whose returns move up and down under different market conditions, the investor can protect himself against significant losses. Historically, the yields of the three major asset classes – stocks, bonds and cash – have not moved up and down at the same time. The market conditions that cause one asset class to do well often cause another asset class to have average or poor returns. By investing in more than one asset class, you reduce the risk of losing money and your overall portfolio return will be more balanced. If the performance of one asset class drops, you will be able to offset your losses in that class with better returns in another asset class.

Create and maintain an emergency fund

Most savvy investors put enough money into a savings product to cover the unexpected. Some make sure they have up to six months of their income in savings so they can draw on their cash fund if needed.

Consider rebalancing your portfolio occasionally

Rebalancing involves bringing your portfolio back to the original asset allocation. By rebalancing it, you ensure that your portfolio does not overemphasize one or more asset classes and bring your portfolio back to a comfortable level of risk.