Investing in stocks is a very broad topic that can be approached from many different angles. Here, you will find some great information that will help to understand how to earn a decent return while keeping risk to minimum and manageable levels. The concept is simple, if you can’t keep what you have, you won’t have anything to keep.
The first order of business is to assess your individual financial situation and goals. Without getting into financial planning 101, you must ask yourself what you’re trying to accomplish. Are you trying to accumulate money for retirement? Are you in retirement and trying to earn an income to spend on the assets you have? Do you have extra time on your hands and would like to day trade? (Hint: bad idea, might as well visit the nearest casino, at least you might get some free drinks while they empty your pockets)
If your objective is growth, and you have a long time horizon until retirement, and you’re working, earning money, not in debt and can afford to have the invested money fluctuate up and down from time to time, then you may be a candidate to take on some risk.
If your objective is to produce income with your assets because you are living off your hard earned, inherited or won (from lottery) assets, then a much different approach must be taken. Safety of principal is the most important thing to consider.
The way to approach the stock market can be viewed from many different lenses. For this particular segment, we will focus on three broad methods. There are many different variations and strategies used to invest or trade stocks, but if we cover them all at the same time, the risk of confusion rises and will be counterproductive.
Day Trading– This form of trading the stock market became very popular in the mid to late 90′ with the advent of two things, the dot com craze (bubble) and online trading accounts. It became very easy to buy any stock, wait a few minutes or hours, and sell it higher for a profit. Whether you were a novice or an experienced trader/investor, the market produced the misconception that you were smart. Once the bubble burst, everybody who lost too much money to discuss, became less smart and more in tune with reality. Day trading is for very few people who have or follow a specific system, and maintain a high level of discipline when it comes to risk management. There are about as many professional and successful day traders as there are professional blackjack players. Unless you’re one of those people, stay away from this tactic – you will most likely lose money and wish you never tried.
Swing Trading – A close cousin to day trading, but can also be considered momentum trading. Anyone who is considered to be swing trading is usually holding stocks for more than a day, but typically not for the long term. These traders/investors are looking to catch a short term trend where they can book a quick profit. This can be effective, but still risky for the individual who is not experienced or has a proven system.
Buy & Hold– Also known in some circles as buy and hope. Over long periods of time this strategy has worked very well. However, these days an investor has to be more careful than the a period of a perpetual bull market like we experienced from 1982 – 1999. Consider buying some of the best mutual funds or stocks by market capitalization in the year 2000. In most cases, if you didn’t take any profit along the way, you could still be down in your original investment. Over the 10 year period from 2000 – 2010 the market had two major corrections, and the Nasdaq which has primarily technology stocks is still down 50% from its high, 10 years later.
Most investors have short term memory and no system or discipline.
How to figure out what to buy– This is only a portion of the question. Knowing when to buy at what price is much more important that what to buy. Most people don’t understand that we should only be intending to rent investments while it’s convenient for us. Too many times people become emotionally attached to an investment and make up all kinds of reasons not to sell. They say, “I don’t want to pay taxes,” or “I like the dividend.” These reasons, and others are the beginning ingredients leading to short and long term failure. Most people never really make an serious money in the markets because the don’t understand that selling for a profit is the ONLY way to make money. How many times have you watched a stock go up 40%, felt great about it, then ended up selling at a loss some time later. Why does this happen? Because you most likely need to learn some very basic investing techniques, and that’s why your here…stay tuned.
When to buy and When to sell is all based on market psychology. Our newsletter service utilizes many strategies to determine what to buy and at what price, but none of our techniques takes precedent over market psychology. For example, when everyone in the media, money managers, investors, shoe shine guys, cab drivers and others start telling you that the market must go up and all the indicators we watch are at an extreme to the bullish side, what do you think we are advising our readers to do? You’ll find out soon enough.
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