There are two basic ways to trade the stock market – shooting in the barrel or using strategies to determine which stocks to buy, when to sell, and how to protect your investment dollars. Needless to say, strategies outperform barrel shooting by a large margin. There are, however, hundreds of trading strategies to choose from. Of all of these there are a couple of tried and trued methods that have worked well for investors over many years. The beginning investor is advised to investigate some of these basic strategies and see for himself how they perform. New strategies can be explored once the basic ones are well-understood.
Hedging is a way of protecting an investment by reducing the risks involved in holding a particular stock. The risk that the price of the stock will drop can be offset by buying a put option that allows you to sell at the stock at a particular price within a certain time frame. If the price of the stock falls, the value of the put option will increase.
Buying put options against individual stocks is the most expensive hedging strategy. If you have a broad portfolio a better option may be to buy a put option on the stock market itself. This protects you against general market declines. Another way to hedge against market declines is to sell financial futures like the S&P 500 futures.
Dogs of the Dow
This is a strategy that became popular during the 1990s. The idea is to buy the best-value stocks in the Dow Industrial Average by choosing the 10 stocks that have the lowest P/E ratios and the highest dividend yields. The companies on the Dow Index are mature companies that offer reliable investment performance. The idea is that the lowest 10 on the Dow have the most potential for growth over the coming year. A new twist on the Dogs of the Dow is the Pigs of the Dow. This strategy selects the worst 5 Dow stocks by looking at the percentage of price decline in the previous year. As with the Dogs, the idea is that the Pigs stand to rebound more than the others.
Buying on Margin
Buying on margin means to buy stocks with borrowed money – usually from your broker. Margin gives you more return than if you were to pay the full cost outright because you receive more stock for a lower initial investment. Margin buying can also be risky because if the stock loses value your losses will be correspondingly greater. When buying on margin the investor should have stop-loss orders in place to limit losses in the case of market reversal. The amount of margin should be limited to about 10% of the value of your total account.
Dollar Cost and Value Averaging
Dollar cost averaging involves investing a fixed dollar amount on a regular basis. An example would be buying shares of a mutual fund on a monthly basis. If the fund drops in price the investor will receive more shares for his money. Conversely, when the price is higher, the fixed amount will buy fewer shares. An alternative to this is value averaging. The investor decides on a regular value he wishes to invest. For example, he may wish to invest $100 a month in a mutual fund. When the price of the fund is high he puts a higher dollar amount in the fund and when the price is low he spends less money. This averages out his investment to the original $100 per month. Value averaging almost always outperforms dollar cost averaging as a percentage return on the money invested. When used as part of a broader trading strategy it can help secure the growth of your investment fund.
Why would a company do this?...
Bull Bear Markets
Bull and Bear are the terms to describe the general conditions of the stock market. These do not refer to ...
Types Of Trading
The stock market also provides opportunitie...
Most stock trades are done through a brok...
The 'Stock Exchange' is the correct term for the physical location for trading stocks. Each coun...
All of these factors – low price, lack of standards, and lack of stability – make penny stocks one of the riskiest inve...
Stocks Trading Signals
Investors who treat trading as a full-time job have the time to watch the market movements for signals. Oftentime...
Stocks Vs Bonds
Bonds always carry the risk that the principal amount may not be paid back. Compa...
The basis for technical analysis is the belief that stock prices move in predictable patterns. All the factors ...
A contract to buy is called a 'call option'...
There are many different stock indexes, the most common in the United States being th...
Fundamental Analysis 2
Earnings per ShareThe overall earnings of a compan...
The goal of fundamental analysis is to determine how much money a company is ...
To a certain extent stock prices are determined by investor confidence but that confiden...
Technical Analysis 2
These perks are not free – full service brokers charge the highest commission rates in the industry. Whe...
Stocks Vs Mutual Funds
What is the advantage of a diversified portfolio? It offers protection against rapi...
Pink Sheets Stocks
Penny stocks are securities that are less than $5 in value. Although they can be...