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Friday, February 5, 2016

4 Ways to Identify a Risky Stock

You are a small investor reasonably active in the market. Using cricketing metaphors, you have 'hit a few sixes' with your selected stocks. You have also 'got out for a duck' a few times.

Your portfolio is full of mid-cap and small-cap growth stocks - in the hope that some of them will turn into multibaggers. But you are not sure which ones are too risky and should be sold.

Ask yourself some of these questions:

1) A stock you bought rose 10% quickly, but has since slipped down 20% on some adverse news. What will you do?
2) A stock falls 10% just after you buy it, but you keep holding it to get back your 'buy price'. It falls another 5%. Will you hold on, or buy more, or sell?
3) A stock takes off like a rocket as soon as you buy it, rising 60% in 3 months. Do you take part profit, or sell off, or buy more at the next dip?
4) A stock gives you 150% returns in 1 year, and then corrects 30%. Will you book profit, or buy more?

These are common questions faced by many small investors. How you answer these questions - not to me, but to yourself - will determine how successful you can be as an investor.

In other words, you should have a strategy on how you will deal with risky stocks in different market situations. 

Your strategy should be clearly written down in a notebook or diary with bullet points, and referred to on a regular basis. Otherwise, you will be prone to repeat the same mistakes over and over again.

Need help in figuring out risky stocks that should be avoided? You don't need to go far. Here is a link to an article from investopedia.com that will guide you:
4 Things That Make a Stock a Risky Bet


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