Balancing Risk with Diverse Investment Types

Finance

Diversification is a standard best practice for investors of all types. And while many stock market investors diversify their portfolios well within a single market, their strategy has one fatal flaw. Diversification is built into many stock-based structures, like mutual funds and ETFs. Ownership of many stocks is intended to allay the risk of loss due to the sudden drop in value of one stock or another. Because the market tends to gain value overall, diverse ownership takes advantage of this overall growth, carrying the stock market investor to new heights. The only problem is, this strategy is only effective in bull markets. Many investors lose everything during bear markets, often at times in their lives when they can’t afford to lose it.

It is important for investors to understand and practice to concept of diversification of investment type. This means that investors should have portfolios that includes stakes in different markets, businesses, enterprises, and other kinds of investment. This may include real estate holdings, stocks, binary options activity through Banc de Binary, and many other types. To better communicate how this might play out in the life of a real investor, we’ll show the risk balance relationship between stocks and binary options.

Stock investment and binary option investment are two related, but totally different investment types and risk structures. They can be thought of as two sides of the same coin. Most of us are much more familiar with stock investments, where investors by pieces of a company in the hopes that each piece will become more valuable as the company grows. The risk inherent in this model is that the company will not grow. Internal difficulties, competition, or decline in the regional or national economy could sink a stock’s value, leaving an investor with much less money than they started out with.

Let’s compare this to binary options trading. With binary, an investor might have a stake in the value changes of the exact same stock in the stock trading example above. But with binary options, the stock isn’t actually purchased by the investor. Instead, the investor makes a value judgment about the stock in question, whether it will increase or decrease in value by the end of a predetermined amount of time. The investor only cares if the value change is consistent with his or her chosen direction. If it is, the investor gets dividends based on the amount that the value exceeded (or fell beneath) a certain threshold. If the price doesn’t go along with the investor’s hopes, the original investment is lost, totally or partially.

These two investment types have totally different types of risk. For the stock market investor, there is the risk that the stock will lose value or that the market will be depleted. For the binary options investor, there is no worry that the markets are healthy or not. Dividends can be earned even if the markets are in serious decline. In some ways, binary trading is the riskier option, though it is also immune to the absolute risks inherent in real stock ownership. There is a place for both in the investment behaviors of smart investors.