Stock Trading Strategies - Which One Is Right For you?

When it comes to trading on the stock market, there are two choices to make, either randomly choosing and hoping for luck or using strategies to determine what stocks to buy, when to sell and how to protect your investment dollars. It is much smarter to use strategies, but the investor will have to choose from hundreds of different strategies. There are a couple of methods that have worked well for many years. Beginners should first investigate these basic strategies to see how they perform, and then the investor may explore new methods.

A popular way to reduce the risks involved in holding a specific stock is called hedging. By purchasing a put option, an investor is permitted to sell the stock at a specific price within a specified time frame. Therefore one can effectively counterbalance their risk if the price of the stock does indeed drop. If the initial price of the stock goes down, the value of the put option should automatically increase.

The most costly hedging strategy is that of buying put options against individual stocks. Buying a put option on the stock market itself may be a better idea if your portfolio is broad. That way, you will be protected against general declines in the market. Selling financial futures, such as the S&P 500 futures, is another trick to hedging against market declines.

This approach became popular in the late 1990s. The plan is to purchase the stocks with the best value on the Dow Industrial Average by selecting ten stocks with the lowest price-earnings ratios and the highest dividend yields. Companies on the Dow Index are well-established businesses that provide dependable investment performance. The notion is the 10 lowest on the Dow possess the greatest potential for growth in the coming year. A new spin on the Dogs of the Dow is called the Pigs of the Dow. This method chooses the five worst Dow stocks using the percentage of price decline from the previous year. As with the Dogs, the idea is that the Pigs stand to bounce back more than the others.

Buying stocks with money that is borrowed, usually from a broker, is called buying on margin. Because you have a lower original investment on the amount of stock you purchase, you'll get more of a return when you buy on margin than if you bought the stock outright. On the other hand, if the price of the stock decreases, your losses will increase, which makes margin buying considerably riskier. The investor should have a stop-loss order in place, in the event of a market reversal. This will limit potential losses when buying stock on margin. Ten percent of total account value is the limit that should be placed on the amount of margin.

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.

Article by: ReginaldT.Hobbss | Total views: 45 | Word Count: 551

About the Author

Quit losing time and energy looking for the most effective Online Investment tips, tools, and methods by visiting http://www.YourInvestmentOptions.com - a popular site that takes pride in providing the latest info on stock trading and investing for traders of all skill levels.