With the growth of the stock market indices, more people with any amount of financial power start investing. But most of these investments fail or sometimes even lead to the destruction of people’s capital in the stock market. To invest, people must have accurate and complete information on how to invest and manage capital, because stepping into this field will bring a lot of risk. What is capital management? Maybe this is a question that has occurred to you. Capital management is the knowledge that an investor decides to invest based on his personality and financial goals. Knowing what capital management is will not only help you survive in the stock market, but also increase your profitability and capital. In the continuation of this article, we are going to ask what is capital management Let us answer and explain the main pillars of capital management for you dear ones in the stock and forex markets.
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What is capital management?
Capital management or risk management is a strategy that a trader invests according to his investment knowledge and skill in order to get the most profit. The main goal of management is risk control and the survival of investors in the stock market, which is why it is also called risk management in some educational sources. In fact, capital management means that an investor must accept a certain risk in order to obtain profit. Now, in order to prevent and reduce the risk of transactions, the investor must calculate the possible return and risk before starting the transaction in such a way that the possible loss is reduced or eliminated. Observing the balance between the amounts of risk and possible profit will make the investor survive in the market, be profitable and increase his capital. Therefore, you need to know how to manage your capital based on investment models and methods.
Each person’s capital management is different from another person, and each person invests according to his investment perspective, personality, age, financial goals and personal mood. Therefore, it is not possible to give a single solution for all traders, and each person’s risk rules are different from another person. For example, people dream of getting rich in a short period of time and enter the stock market and buy dollar stocks or non-dollar stocks; These people start buying and selling stocks without having any information about dollar stocks. They may be able to make a profit from this, but it won’t be long before they lose their capital altogether. Because they have not understood the concept of capital management and buy and sell stocks without considering the risk.
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Capital management in forex
The most important skill for buying and selling stocks in the forex market is capital management in this market. The stocks in the forex market have a lot of volatility due to the fact that they are formed at the global level, and knowing what the subject of capital management is in this market will help you a lot. Capital management in forex is very important. So that most of the successful traders in the forex market believe that the secret of their success is the use of a specific capital management system in their transactions. It should be noted that even after calculating the amount of return and transaction risk, do not enter all your capital into the transaction, although that issue also depends on how much risk you are willing to take.
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The best forex capital management strategies
- Percentage capital management
- Step entry and point exit
- Step entry and exit
Capital management in the stock market
Capital management in the stock market, like capital management in forex, helps investors to reduce potential losses in transactions. Before entering the stock market, every investor should be well versed in capital management in the stock market, because knowing this will increase one’s capital. There are 3 important principles that must be considered before entering the stock market.
- Capital management
- Gaining knowledge and skills
- Understanding market behavior
The investor must follow the above 3 principles that are needed to start and enter the stock market to invest and succeed in it, if he ignores one of them, the only thing he will get is losses. You can also read the article What is Leverage to get a better understanding of this topic.
What are the main pillars of capital management?
As we said in what is capital management section, there is no single formula and method for capital management. In order to have principled and successful transactions, the investor must follow the conventional indicators related to it. The 5 main pillars of capital management are risk, return, transaction volume, return-to-risk ratio, and capital loss ratio, and following these principles will lead to your profitability in the financial markets.
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Risk means a possible loss that the investor will suffer to achieve more profit in the transaction. In financial markets, it is impossible to avoid risk and it is only possible to reduce possible losses based on logical calculations. Often, investors are tempted to make more profit and take more risk, which sometimes ends up being their loss.
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The net profit of transactions is called return. Like the risk, the return is calculated as a percentage, the increase in the stock price and annual cash profit increases the amount of return. There is no specific criterion to calculate the optimal return percentage, because it varies based on assets and risk and market fluctuations. Getting the desired return depends on the skill of the investors and their investment perspective. To learn about the methods of oscillation, read the article What is Oscillation?
The units for counting assets in investment markets are different, and the volume of transactions is the number of units that an investor has purchased from an asset. Entering into a transaction with a high volume carries a high risk and on the other hand, it will also have a higher return. In fact, if your prediction is correct, you will receive profit according to the trading volume, and if it is wrong, you will lose. Therefore, injecting all your capital into a transaction may have irreparable consequences such as losing your capital.
Return to risk ratio
The return to risk ratio must be evaluated and calculated before investing, because it will indicate the value of your investment. The worst possible case for the return-to-risk ratio is equal to 1, and any percentage less than this amount will result in the loss of the investor in transactions.
Capital loss ratio
The capital loss ratio is calculated from the investor’s previous capital difference, before entering into a transaction and after exiting that transaction. All traders experience capital loss, which varies according to the skill of each investor. In general, the most important principle in financial markets is survival and capital management.
Knowing the principles and elements of capital management before entering into a transaction in trading markets such as the stock exchange and forex prevents the loss of capital and the destruction of capital at once. Therefore, investors should learn the 5 main pillars of capital management and then start injecting capital in the financial markets. In this article, we explained what capital management is and what capital management is like in important markets such as forex and stock market, as well as the principles and strategies of these financial markets.