Anyone who invests in the stock market is aware that risk is an inherent and unavoidable factor. Being aware of other factors such as volatility, time in force, supply and demand, and other things that affect price movement can allow investors to manage this risk. The higher the risk, the higher the potential reward – likewise, lower risk profiles are also likely to result in lower returns.
This constant presence of risk is essentially why there are no insurance policies for stock market losses. With such a high and complex risk profile, there are currently no insurance policy models that would be applicable for stock market traders in a way that’s fair to either party. When it comes to stocks, bonds, or mutual funds, there’s no policy that can protect you from losing your initial investment or depreciation in market value. However, there are many methods and options that can allow you to ‘insure’ your stocks even without an actual insurance policy.
This starts with carefully picking which firm you choose to open a brokerage or investment account with. In North America, investment organizations that are members of either the Securities Investor Protection Corporation (SIPC) or the Canadian Investor Protection Fund (CIPF) are afforded some amount of protection should their firm go bankrupt or dissolve.
While the SIPC handles cases in the U.S., the CIPF handles those in Canada, and the two work closely to handle insolvencies that affect accounts with cross border transactions. However, not all brokerage firms or companies are members of these protection organizations. This is why it’s important to choose your brokerage company wisely from the start. Apart from whether or not the company is a member of one of the aforementioned organizations, they should also be able to put your money in a variety of stocks and investment options.
In fact, investing in various types of stocks and options is another direct way of ‘insuring’ your money. This is called diversification, and it involves putting your money in a variety of investment options to spread out and minimize risk. It’s essentially the principle of not putting your eggs in one basket – applied to the stock market. The simplest way to do this is to invest in different types of stocks within the purview of your specializations, which may include different companies in one market, or even two to three different markets in which you’re confident in investing.
You can also turn to options and futures, but only if you’re a veteran in the investment game. Though not technically insurance policies, some futures contracts may function in a similar manner, with stipulations like gaining value as prices fall. Apart from stock options, you can find these contracts through exchange-traded funds and indexes as well. While navigating these contracts can be very tricky and challenging, choosing the right options can afford your investment accounts a significantly higher level of built-in ‘insurance.’
While there are currently no insurance policies that can insure you against unfavorable market movements, there are many ways to create some insurance of your own. Make sure you go with a brokerage that’s protected by either the SIPC or the CIPF, learn to diversify your wealth, and talk to your brokerage about your options in terms of futures and contracts. Risk is an inherent element in stock trading and investment. And protecting your money is a matter of managing this risk.
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