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If you are new to the stock market, you should choose to use trading strategies over the shooting in the barrel method. Strategies have been proven to outperform barrel shoot significantly. There are several basic strategies to start with that will help you determine how to protect your investments by advising what stocks to buy and when to sell. Once you have mastered the basics, you can learn more about the hundreds of advanced 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 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.

An investor must choose a fixed dollar amount to invest regularly to successfully complete dollar cost averaging. For example, the buyer may invest in mutual fund shares every month. If that fund plummets in price through the market, that investor will be given more shares for his monetary expenditure. So, as the prices rises, the fixed amount price will allow the purchase of fewer shares.

This entry was posted on Tuesday, August 26th, 2008 at 6:39 pm and is filed under Business.You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.