Stock Trading Strategies - Which One Is Right For you?

There are two major ways to trade in the stock markets: picking stocks at random or doing research to determine which stocks to buy and if and when to sell them. Obviously, thinking things through will give you far better results. However, there are hundreds of different strategies to pick which stocks you want! A few of them are the tried and true standards that investors have had success with - those are the ones new investors should start with and see how they perform. After they understand those basic strategies, they can branch out into more complicated strategies.

You can lower your risks through hedging. There is always a risk that the price of a stock will drop, but you can purchase a put option. This allows you to sell the stock at a set price within a particular period of time. Then, if the stock does fall, the value of your put option will rise and you can offset your losses.

The most expensive hedging strategy is buying put options against individual stocks. This is often not the best option; if you already have a diverse portfolio, you may fare better if you buy a put option on the stock market, or to sell financial futures. In both cases, you are protected if the overall market prices drop.

This approach to buying stocks grew in popularity during the 1990s. The basic idea behind this strategy is to buy those Dow stocks that comprise the best value stocks at the moment, by choosing the 10 stocks that have the best, i.e. lowest, P/E ratio and the highest dividend yields. Because the Dow favors well-established companies that perform well year to year, these 10 are considered the most likely to grow in the next year. A variation on this strategy is called the “Pigs of the Dow,” in which you purchase the 5 stocks that had the greatest drop in price over the past year. Again, these are thought to be the stocks most ripe for growth.

Purchasing stocks on margin allows a buyer to obtain stocks, usually aided by a broker, without paying the full amount they are worth. This gives the buyer opportunity to gain a return that is greater than if they were to pay the full cost upfront. The buyer has to invest less money and is able to get more stocks. Buying stocks on margin is also more risky than buying stocks outright; if a loss is incurred it can be greater than the amount of money that was put in. It is important when buying on margin to have stop-loss orders in place, which limit the losses in case the market turns around. When possible the amount of margin should not exceed 10% of the total value of your account.

One of the best ways to grow your investment securely and effectively is to use cost averaging. The idea behind dollar cost averaging is to purchase a set dollar amount of stock or mutual funds on a set schedule. For example, you can purchase $100 of a particular mutual fund every month. The idea behind this is that you will be making purchases in both rising and falling markets. As the price rises you will be able to buy fewer shares and as the price falls you will be able to buy more shares.

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