Stock Market Strategies
There are many different ways to play the stock market. These stock market strategies vary in so many ways. In this post I’ll go over a couple of these strategies to help you decide which one is best for you.
You need to also take into consideration that some strategies require you to be more involved in the day by day market than others. All of them involve doing your due diligence in regards to knowing what you’re investing in. Research is the key to being able to make money in the stock market.
The buy-and-hold method is good for an investor who won’t have much time to follow the market on a regular basis. Once an Investor has found a company that (s)he wants to invests in, they build a position into the company and basically leave it alone. What you need to know is that you never buy all of your share in a company at once. Stock prices rise and fall all the time and if your timing is not right, you could lose a few percentage gains. Buying your stocks incrementally and not all at once will help you for when the price falls. You buy as the price drops to lower your cost basis (average price per share). With this strategy, I recommend that you don’t invest more than 20% of your total portfolio into any one sector. Diversifying your portfolio is the best way to hedge yourself against sudden drops in any one sector.
Day Trading is something that everyone has heard about. Day traders usually trade penny stocks, but are also known to do the same with mid-cap or larger companies. This is one of those strategies that require a lot of time during the trading hours. Unlike the buy and hold method, most day traders will not hold their position in any company for more than three to five trading days. This method is not good for those who are still new to the stock market.
Shorting a stock is a phase that is used when an investor believes that the price of a company’s stock is going to go down in value. What an investor does is that (s)he’ll borrow shares from another stock holder and sells them. The investor may have a particular date that he’ll need to return the borrow shares. During that period, the investor expects the price per share to fall at which time he’ll buy them and return those share to the lender.
There are other strategies, but I wanted to just give you a few for now. the others will be in a later post.
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Reading Stock Charts – The Basics
When you first take a look at a stock chart, the information you find may a bit overwhelming. Sure, it kind of looks like the same type of graph you’ve seen since 2nd grade, but what does everything mean? To truly understand your investment portfolio, you need to learn how to read stock charts.
If you’re looking at the stock charts in your local newspaper, the type of chart you’ll typically see there is a line chart. This chart simply takes the closing price for each day and connects them in a straight line. On the right hand side of the chart you will see numbers that correspond with the price of the stock. These prices usually are broken down to the penny, so if you’re stock has closed at $10, you will see the line’s last point at 10.00. If your stock raises a dollar in price, to 11.00, it is said to have raised a point. On the stock market, a point is equal to $1, or 100 pennies. On the bottom of the chart you’ll find the date. So that means a stock chart is plotted as time vs. price.
If you’re looking at time-frames shorter than a day, typically used for short-term trading, the time on the bottom of the chart will be broken down into smaller increments. They can be as small as 1 minute (typically used for day trading stock charts), or as large as 4 hours (which is frequently used when trading the Foreign Exchange). By using these small time-frame charts, traders attempt to capitalize on the fluctuations a stock goes through during the trading day. If you’re looking at stock only on a daily basis, you may only see small shifts in the price, but a stock can move several points up or down during the day, only to bounce back to being very close to its opening price. Line charts are not very useful in this capacity, so either a bar chart, or a candlestick chart is used. Both of these types of charts display either a bar, or candlestick per unit of time. These bars/candlesticks show the highs & lows as well as the opens & closes. This is much more useful when day trading or swing trading, because it gives a bit more insight into the stock’s past, and potential future movements.
That pretty much sums up the basics of reading a stock chart. To begin to be able to use this information for your investments, you’ll have to look into technical analysis. Technical analysis is the study of a stock’s data, including its charts, to understand past movements, and attempt to predict future movements.
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