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Using Different Stock Trading Strategies

Jun 6, 2008
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.

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.

When you buy stocks on margin, you are borrowing money to pay for your investment. If the margin is 100%, you can buy twice as many shares as you would have if you did not buy on margin. Usually, this loan comes from your broker. The upside to buying on margin is that your money goes further. The downside is that if the stock goes down, you will still have to pay back the loan. Therefore, you should limit your margin buying and place stop-loss orders to put a floor on your losses if the market should go against you.

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.
About the Author
Quit wasting time and energy looking for the latest Online Investment tips, tools, and techniques by visiting http://www.YourInvestmentOptions.com - a popular site that specializes in providing the most up to date info on stock trading and investing for individuals of all levels of experience.
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