An easy way to reduce exposure to downside risk in a portfolio is to use stop losses. Stop losses are orders that instruct your broker to sell an investment when the price drops and reaches a certain level.
For instance, an investor may decide to buy a stock at $100, while placing a stop-loss order at $95 to protect their capital. If the stock price falls to $95, the broker would immediately sell the stock.
Stop losses are an easy and effective way to minimize risk, reducing exposure to sharp declines in stock prices. It’s automatically dealt with by the broker, so you don’t have to actively monitor your positions.
The downside of stop losses is that short-term stock market fluctuations can often trigger the stop losses unnecessarily, meaning that investors miss out capital gains as the market picks up again.
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