Managing risks and volatility

While shares can be a sound long term investment, are easy to trade and require only a small amount of money to invest, investing in the sharemarket carries with it a level of inherent risk and volatility. Investors should consider the following:

Volatility risk

Share prices can rise and fall very quickly and abruptly. Share investors should be aware that the value of their shares may be subject to considerable fluctuation.

Capital loss

Falling share prices either through market risk or the poor financial performance of the company, can result in capital loss, meaning that your shares are worth less than what you originally paid for them. Furthermore, if the company goes out of business its shares are no longer tradeable on the ASX. If the company goes into liquidation, shareholders rank after the company’s other creditors. Hence shareholders may receive only a small amount of their original investment or nothing at all. It is important that investors continually stay in touch with the financial performance of the companies they invest in.

Timing risk

Markets tend to follow cycles. Often after sharp rises in prices, some shares are more susceptible to larger falls, and their prices may take time to recover. Different sectors and types of companies can follow different price cycles. Though past performance is not an indicator of future performance for share prices, it is important to understand business cycles and how different companies have performed throughout the different phases of a business cycle.

Currency risk

For traders investing in overseas shares, adverse moves in currency need to be considered. This is because when you sell your international shares and want to bring any profits home they need to be converted from the foreign currency into Australian dollars. Most brokers also levy a foreign exchange fee which you need to consider as part of your brokerage cost.

Furthermore, for overseas investments that have offshore operations, adverse moves in the exchange rate can reduce your investment value.

Dividend risk

Investors should not make investment decisions based on the dividends a company is currently paying or has paid in the past. It's not compulsory for companies to continue to pay dividends, and dividends can vary from year to year. Some companies currently paying dividends may not continue to pay them in the future and may elect to simply reinvest their earnings back into the business operations.

Managing sharemarket risks should be an integral part of your investment strategy. Below we will talk how you can mitigate these risks and respond to market events.

Diversification

Diversification is one of the most common forms of risk management. By varying your portfolio across different asset classes and investments, you can help limit the impact of negative events that may affect an individual asset class or investment type.

For example, instead of investing solely into the share market you may spread parts of your investment across other asset classes, such as property and bonds. This may minimise the impact a dip in the sharemarket may have upon your entire portfolio.

Sector Diversification

Whilst you can diversify across different asset classes you are also able to diversify across different sectors within the same asset class. The Australian Securities Exchange (ASX) uses the Global Industry Classification Standard (GICS) method of categorising companies. In total the ASX is broken up into 11 sectors which are further segmented into industry groups, industries and sub-industries. The 11 sectors listed below, each have a benchmark index that tracks the performance of ASX-listed companies in that sector.

Telecommunication Services
Consumer Discretionary
Consumer Staples
Healthcare
Financials
Information Technology
Telecommunication Services
Utilities
Real Estate
Energy
Materials

Diversification strategies

Below is a list of factors to consider when seeking to successfully diversify your portfolio:

Avoid single asset exposures or single asset class/sector risk
Implement asset allocation targets into your investment strategy
Regularly monitor your investments to ensure they are in line with your target asset allocation
Create a habit of regularly revisiting your target asset allocation to confirm whether it continues to suit your financial objectives and risk tolerance.

Using alerts

Alerts are a useful tool that will notify you when a specific event occurs. We can help you in setting up alerts for the following things:

· Ex-dividend alerts: receive an alert once a stock’s ex-dividend date is near

· Price alerts: once a stock price reaches a certain price you will be alerted

· Volume alerts: when the trading volume reaches a certain point

· Announcement alerts: when companies release market related announcements

Stop-loss Orders

A stop-loss order is a sell order that is dependent upon shares reaching a certain price. This price point is known as the trigger price. Once the trigger price is surpassed then the sell order, which may be an ‘at limit’ or ‘at market’ order, is placed on the market.

You should consider that in the event of a market crash or rapid decline in share prices stop-loss orders do not guarantee a trade execution. Your trade may be partially executed or fail to execute during these circumstances.

Important information

Important Information

Share trading with St.George Directshares is a service provided through CMC Markets Stockbroking Limited, ABN 69 081 002 851, AFSL 246381 (‘CMC Markets Stockbroking’), a member of the CMC Markets group of companies (‘CMC Markets Group’). CMC Markets Stockbroking is a Participant of the ASX Group (‘ASX’), Sydney Stock Exchange (“SSX”) and Cboe Australia Pty Ltd (“Cboe”), a Clearing Participant of ASX Clear Pty Limited and a Settlement Participant of ASX Settlement Pty Limited. The St.George Directshares service is made available to customers of St.George Bank - A Division of Westpac Banking Corporation ABN 33 007 457 141, AFSL and Australian credit licence 233714. Neither St.George Directshares nor CMC Markets Stockbroking are representatives of each other. St.George Directshares is not a related party of CMC Markets Stockbroking, the ASX, SSX or Cboe.

Disclosure documents relating to the St.George Directshares service, including Terms and Conditions, Product Disclosure Documents and/or Financial Services Guide (“FSG”), are available at https://trading.directshares.com.au/forms or by calling us on 1300 133 500.

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Trading Exchange Traded Options (i.e., ETOs, Options) can involve considerable risks. You should only trade Options if you understand the nature of the product (especially your rights and obligations) and the extent of the risks you are exposed to. Before trading in ETO’s, you should carefully assess your experience, investment objectives, financial resources, and other relevant issues and carefully consider the ETO Product Disclosure Statement and the relevant educational booklets regarding Options from the Australian Securities Exchange (ASX) at https://www.asx.com.au

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