Strategies in the Stock Market
Strategies in the Stock Market
Getting involved in stock trading through buying and selling stocks can be risky. An investor can easily lose or gain the money he invested. This is why many investors have formulated their own brand of stock strategies through the years. You may have read in previous articles that there are two ways of profiting in trading stocks: by receiving the shareholder’s part of the company’s profit, also known as EPS, as well as earning from capital gains. There are many strategies that can be employed to earn capital gains. One of them is the conservative strategy or more commonly known as the buy and hold strategy.
By the name itself, you can guess what the buy and hold strategy does. The conservative strategy is very risky because the investor is actually investing in stocks that at the moment seem to be losing. The strategy of the investor in buy and hold is to look for stocks that are undervalued and have potential to recuperate. An undervalued stock is one where its stock price is below the real value or true value of the stock. Investors can predict that a stock can earn by using either fundamental analysis or technical analysis or both. The investors then buy these undervalued stocks. These investors prefer to buy stocks as its price is decreasing, also known as buying in the dips. The investor believes that the cheaper the stock price becomes the better for him as he gets to spend less in buying a good stock.
Buy and hold investors do not sell stocks easily. They are not concerned with the daily stock price movements. These investors look to the future and believe that their chosen stock would soon pick up in stock price and they would then sell their stocks with large amounts of capital gain as profit. Of course, the key in this strategy is finding the perfect stock to invest in wherein you are sure that in the long run, the company grows and the stock price increases. For example, the stock ABC has a current stock price of $15. Investor X believes that stock ABC’c price is undervalued and that by holding the stock he will earn once the stock price goes back to its normal value. Investor X buys 50 shares of stock ABC at $15. The next week the stock price of stock ABC plummets to $10. Investor X then buys 100 shares of stock ABC at $10 each. A few months after, the price of stock ABC rises to $30. Investor X believes this is the true value of stock ABC. He then sells all of his 150 shares. For the first 50 stock he bought he earned $750 in capital gains whereas for the next 100 shares of stock ABC he bought he earned $2000.
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