In partnership with Freedom24 – In the creation and evolution of a stock market portfolio, understanding the notion of risk management is essential and even strategic. We take stock.
Let us first characterize the risk linked to an investment in the financial markets: in the case that interests us here, this is the market risk, inherent to any investment. It is the risk of losing money which is correlated to the more or less brutal oscillations in the prices of each asset making up a portfolio. Modern portfolio theory, developed by Harry Markowitz, associates this risk with market volatility, that is to say the extent of variations, over time, of an asset.
Therefore, the consideration of all investors is, for the expected return that they set, to minimize the risks incurred. To build effective investment strategies, several complementary avenues are worth exploring.
The 60/40 portfolio, the investment classic for a good father
The principle is simple: the investor builds his portfolio with two main pockets, one in stocks, with a 60% weighting, and the other in bonds at 40%. This traditional portfolio has the advantage of being able to benefit from the performance of strong securities during good times, with the bond portion playing an umbrella role in more troubled stock market periods. By nature diversified, this portfolio constitutes a basic strategic response for those seeking to optimize their risk management. This model is easy to set up for an investor using a broker allowing access to a wide variety of securities, like Freedom24, thus ensuring the possibility of diversification of their assets.
The importance of professional analysis and investment recommendations
Risk management also requires good support. The use of analyst recommendations can prove decisive, but you still have to know how to navigate the teeming world of changes of opinion, raising or lowering of price targets from the many departments of the company. analyzes of brokers and management company of the place. Awarded by Bloomberg, the Freedom24 analysis team provides turnkey weekly investment ideas, with entry price, objective, investment horizon, risk gauge, and supported arguments.
The importance of hedging strategies
Called hedging, a hedging strategy is a transaction aimed at limiting exposure to risk. A very wide range of products can temporarily cover all or part of a portfolio against exchange rate risk, or the risk of a market correction: trackers (ETFs), put warrants, or even options. By paying a premium, an option allows you to hedge your investment in shares against a supposed and temporary drop in prices within a given period. An economical solution, this essential tool in risk management can be traded at Freedom24, a broker offering the lowest prices in the European Union for options on American stocks.
To go further: structured products
Structured products are financial instruments which allow, in one transaction, to combine a hedging strategy, while guaranteeing, under pre-established conditions, a return calculated according to a mathematical formula. These products offered, constructed and distributed by a financial intermediary, make it possible to combine several assets, to cushion market shocks, while allowing a minimal return to be generated. In this way, they constitute a valuable risk management tool. Innovative in their design and construction, Freedom24’s structured products perfectly address this issue. Concretely, an investor wishing to complete his stock market portfolio with an investment vehicle partly guaranteeing his capital while seeking performance on the American market, if necessary, can opt for a structured product, combining a bond envelope, an asset underlying such as the S&P500 index and a derivative product.
Choosing the right broker
An essential, yet often neglected, avenue for effectively managing the risks of investing in the stock market is quite simply the choice of your broker. Among the main criteria to rigorously check when selecting your broker, in addition to naturally competitive fees:
- – An ergonomic application and a reliable and efficient trading interface.
- – A serious player with solid backing who owns the securities traded.
- – Access to a wide range of products, themes and geographic areas for its investments.
A regulated player, Freedom24 has a representative office in France responsible for customer service in French, and fully ticks all of these boxes. This European broker allows you to trade around a million instruments (shares, trackers, futures, options, structured products, etc.) on the largest stock exchanges in America, Europe and Asia.
Conclusion
An investment strategy must be guided by a return objective, of course. But this quest for performance, over time, is doomed to failure without the rigorous implementation of risk management. This management must be thoughtful and adapted to be effective. To do this, the initial choice of a good broker proves decisive, in the sense that it allows access to suitable products and services: quality financial analyses, wide range of products allowing the implementation of trading strategies. hedging and optimization of risk management. For investors wishing to manage their risks as effectively as possible, this choice of broker is undoubtedly the first step!
This content was produced in partnership with Freedom24. The BFM Bourse editorial staff did not participate in the production of this content.