Learn About Stock Trading Strategies

Stock Trading Strategies

There are two basic ways to trade the stock market – shooting in the barrel or using effective stock trading 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 stock market 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 newbie investor is advised to investigate some of these basic strategies and see for himself how they perform. New stock trading strategies can be explored once the basic ones are well-understood.

Hedging - A Good Stock Market Investing Strategy

Hedging is a one of the better stock trading strategies to follow if your objective is capital protection. 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.

If you have a broad portfolio, buying put options against individual stocks can be an expensive stock trading strategy to follow. A better option may be to buy a put option on a stock index. 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 – Stock Market Trading Strategies of The Past

This is a strategy that became popular during the 1990s. The idea was 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 had 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 stock market trading 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 – One of The Risky Stock Trading Strategies

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 – A Good Stock Market Investing Strategy

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. Stock Trading Strategies like 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.