There are several trading strategies used by investors in buying and selling in the stock market. These strategies are used by investors to check out the stocks to buy and the time to sell them.
These strategies count up to more than a hundred ways, all tried and tested, all effective, and have been so for many years. Experts advise beginners to investigate some more of these basic trading strategies.
Hedging
Hedging is a way of protecting an investment through the reduction of the risks involved in holding a particular stock. One way is buying a put option.
This allows the selling of the stock at a particular price within a certain time period. In turn, this offsets the risk of a decrease in the stock prices. (There will be a value increase of the put option as soon as the stock price falls.)
Selling financial futures like the S&P 500 is another way of hedging against market declines. However, the most expensive hedging strategy is to buy put options against individual stocks.
Investors with big portfolios is better off if they buy a put option on the stock market itself for the reason that it protects them from general market declines.
Dogs of the Dow
This strategy (popular in the 90s) entail the buying of the best-value stocks in the Dow Industrial Average. These are the ten stocks with the lowest P/E ratios but with the highest dividend yields.
This tactic hinges on the idea that these ten lowest companies have the most potential for growth. The Dow Index have their listed companies as those which have a reliable investment performance.
Pigs of the Dow
This is a 180-degree variation of the Dogs of the Dow strategy. In Pigs of the Dow, five of the worst-performing stocks on the Dow are selected, based on their price decline percentage from previous years.
The twist lies in the assumption that these Pigs of the Dow, the worst-performing five stocks, are going to rebound more than the others will.
Buying on margin
Buying on margin is buying stocks using money from a broker. Because of more stocks received despite the low investment, the investor is given more by margin buying rather than by full payments.
In the event the stock loses value, the losses in margin buying is correspondingly bigger. In order to limit these, investors have stop-loss orders when buying on margin. This is usually about 10% of the total account value.
Dollar cost averaging
This is investing fixed dollar amounts on a regular basis. (Example: monthly buys of shares from a mutual fund.)
A price drop will cause the investors to receive more shares for their money. Conversely, a raise in the price will cause fewer shares bought.
Value averaging
Value averaging is the alternative to dollar cost averaging. This involves a decision to have investments set to a regular value.
If the price of the fund increases, the investors will put in higher dollar amounts to match the increase. If the fund price decreases, they will spend less money. Their investment will average out to the actual cost of the fund.
To date, value averaging performs better than dollar cost averaging strategy most of the time. When used in tandem with the other stock market strategies, value averaging can actually help in securing investment fund growth.
Tuesday, February 15, 2011
Stock Market For Beginners
The stock market is also known as the equity market where companies have access to capital and investors. Once investors had bought shares of the company, they look forward to potential gains of their investments in the future performance of the company.
Stock exchanges
With the exchanges as the main players, the stock market is like a big superstore, a buying and selling place where people buy stocks. These exchanges are where the buyers and sellers are matched.
The primary exchanges in the U.S. are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and some regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.
A few years back, all the trading was done in the traditional exchanges like the NYSE and the like. Now, almost all the trading is done through the NASDAQ which uses ECNs and thousands of other firms with access to the NASDAQ for trading.
Electronic buy-and-sell
Here is a sample on how a stock market transaction is done today. First, you open an account with say, E*Trade by sending E*Trade a $1,000 check. E*Trade then deposits the check into a trading account listed under your name.
You log on to E*Trade and place an order to buy 100 shares of stock in Company X. (The stock is currently trading at $5.) E*Trade uses its networks to tell NASDAQ and all its related networks that there is a demand for 100 shares of Company X.
NASDAQ finds someone who is willing to sell 100 shares of Company X and instantly facilitate the trading of stocks between you and the person selling the shares.
The data is sent to a clearinghouse where it is processed and the shares will now be registered to you. The actual stock certificates are held �in street names� and do not need to change hands, although you can request that the certificates be transferred to your name.
How stocks get valued
Stocks are valued two ways. One is created using some type of cash flow, sales or fundamental earnings analysis.
The most common is the P/E ratio (Price to Earnings Ratio). This valuation method is based on historic ratios and statistics. The aim is to assign value to a stock based on measurable attributes. The form is what usually drives long-term stock prices.
Supply and demand
The other valuation follows how much the investors is willing to sell them. Both of these values changes as investors change the way they analyze stocks. In short, the stocks are valued based on supply and demand.
If more people want to buy them, the price goes higher. Conversely, the more people that want to sell the stocks, the lower the price.
Market forces
In the short run, the market is driven by simple human emotions of greed and fear. In periods of prosperity, the market usually rises above its real earnings.
In tough times, political uncertainties and other negative factors, the stock market often performs worse than its underlying fundamentals. In the long run, however, the stock market is driven by several underlying economic, financial and global growth.
Stock exchanges
With the exchanges as the main players, the stock market is like a big superstore, a buying and selling place where people buy stocks. These exchanges are where the buyers and sellers are matched.
The primary exchanges in the U.S. are the NASDAQ, the New York Stock Exchange (NYSE), all of the ECNs (electronic communication networks) and some regional exchanges like the American Stock Exchange and the Pacific Stock Exchange.
A few years back, all the trading was done in the traditional exchanges like the NYSE and the like. Now, almost all the trading is done through the NASDAQ which uses ECNs and thousands of other firms with access to the NASDAQ for trading.
Electronic buy-and-sell
Here is a sample on how a stock market transaction is done today. First, you open an account with say, E*Trade by sending E*Trade a $1,000 check. E*Trade then deposits the check into a trading account listed under your name.
You log on to E*Trade and place an order to buy 100 shares of stock in Company X. (The stock is currently trading at $5.) E*Trade uses its networks to tell NASDAQ and all its related networks that there is a demand for 100 shares of Company X.
NASDAQ finds someone who is willing to sell 100 shares of Company X and instantly facilitate the trading of stocks between you and the person selling the shares.
The data is sent to a clearinghouse where it is processed and the shares will now be registered to you. The actual stock certificates are held �in street names� and do not need to change hands, although you can request that the certificates be transferred to your name.
How stocks get valued
Stocks are valued two ways. One is created using some type of cash flow, sales or fundamental earnings analysis.
The most common is the P/E ratio (Price to Earnings Ratio). This valuation method is based on historic ratios and statistics. The aim is to assign value to a stock based on measurable attributes. The form is what usually drives long-term stock prices.
Supply and demand
The other valuation follows how much the investors is willing to sell them. Both of these values changes as investors change the way they analyze stocks. In short, the stocks are valued based on supply and demand.
If more people want to buy them, the price goes higher. Conversely, the more people that want to sell the stocks, the lower the price.
Market forces
In the short run, the market is driven by simple human emotions of greed and fear. In periods of prosperity, the market usually rises above its real earnings.
In tough times, political uncertainties and other negative factors, the stock market often performs worse than its underlying fundamentals. In the long run, however, the stock market is driven by several underlying economic, financial and global growth.
Subscribe to:
Comments (Atom)