Income Finance

Posts Tagged ‘Strategy’

The path to any goal oriented achievement is difficult and is saddled with obstacles. Achieving success in share investing can be compared to the obstacle race. One needs to cross many hurdles, some may no be able to clear hurdles and may give up in the mid-path, and the one who wins the first place, must have practiced hard to achieve the victory target. So is the case in share investing! One may be clear about the goal, but one can’t be sure about making a clean jump through each and every hurdle. In the volatile share market, to clear all hurdles is not an easy job

A new investor enters the share market and hopes to make a profit. Without proper knowledge of trading, enthusiasm alone is not going to take one to the path of profit.

The important issue is, you need to be clear about your goal and the method you employ to achieve it. Once you decide about the size of the capital, that you wish to invest in shares, your next step is to create a portfolio.

To begin with, make a conglomeration of safe blue-chip shares that belong to different segments of the industry.

To dwell upon a perfect strategy, you need to work in close collaboration with a financial consultant. He will have lots of researched material, and depending on the size of your intended investment in shares, he will be able to guide you properly. Your strategy is important. But implementation of the strategy is more important.

Once you have the goal-oriented approach to investing, you know how much money you want at a particular stage of your life. It may be for your children’s education; to buy your dream house. A joy trip around the world! When chalking out your goals, certain questions will come through your mind. To being with:

What are my present savings?

How much will I need for a particular objective?

How long will it take to reach the investment goal?

What should be the mix in the portfolio to reach the target safely?

Am I moving on the right track to reach the goals?

When you are put on inquiry with several such questions, your thinking process gets highly activated, and after intensive deliberations, you are likely to arrive at certain conclusions.

Be realistic about the goals and the time frame that you have set to reach it. Successful investing is riddled with many impediments, but do not get discouraged when the market does not come up to your expectations. You need to take a long term view, and the market is bound to come to terms with your expectations.

The duration of your goals, will enable you to decide about the appropriate mix of assets. If your goal is for a period of 4-5 years, go for conservative investments, devoid of elements of risks. One strategy may not meet your all goals. Frame and follow different types of strategies depending upon the nature of the goals. For each goal, think about your tolerance for market fluctuations. Diversify our portfolio and stay fully protected by setting stop loss limits for each share.

Once you decide about the goal, you need not stay rigid about the issues relating to the goal. Make an annual assessment of the progress achieved towards the intended goal. If the progress is not up to your expectations, reallocate the assets suitably. Invest more, if necessary.

Market volatility may have short term negative effects on your investments. Do not take a grim view of the situation and do not read too much in between the lines. Do not go on shifting the pattern of your investments. Market loves and rewards the one who takes firm decisions. Do no make an attempt to dig the well at too many places.

It is difficult to predict the share market as many variables impact the market. Your share market strategy needs to be a mixture of dynamism and conservativeness.

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The younger you are the better the time to start investing in stocks. That is not to say you cannot start anytime, but if you were successful when younger, the amount you would have earned would be much greater than starting out later in life. Probably the best place to start investing is through your job and a 401k. Some companies still match dollar for dollar in your investment in the 401k retirement fund. Always put in what your company is matching, it is free money. Matching means that if the company will put in $ 400 dollars a week into your 401k, you should not put in less. The 401k invests primarily in mutual funds, a basket of stocks in many sectors that spread the risk around. 

The stock market generally goes up over the years. You do not think the big players would put money into something that will go down. If you have some extra funds you can diversify by purchasing gold or silver.

This can be in the form of gold or silver bullion. Bullion means the price of the gold or silver is strictly based on its fineness or purity and its weight, according to market conditions. Many 401k funds will accept gold bullion into its portfolio for you. You might be wise to buy some gold or silver bullion coins and keep them in your home to hedge against a national emergency or something catastrophic. If that occurred your dollars would be worthless and you could use your coins to survive until things improved. A tank of gas or a loaf of bread might tide you over. 

As you become more sophisticated in your investing and have educated yourself, you can invest privately in addition to your 401k or IRA, if you are self-employed. Remember that every purchase or sale will cost you a commission.

You can start purchasing stocks of companies you believe will be successful after studying their economic reports. Choose a few across sectors. You would not want to buy only clothing stocks or only energy stocks, otherwise you are not spreading the risk. Dollar cost averaging is the way to go. You put the same amount of money into the stock, e.g. weekly and your purchases are made whether the stock is going up or down, hence dollar cost averaging. Have all the dividends (earnings) distributed to you put back into the company so as to earn more money.

This is a conservative strategy. There are more bold strategies like investing in foreign stocks and hedge funds, but that is primarily for experienced investors. As you become knowledgeable you will make a bit riskier investments which will bring you more profit.

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Penny stocks are named based on literal as well as perceived value. Penny stocks aren’t always valued at a penny per share. Some may be as high as a dollar. Many people shy away from them because they appear to offer the lure of getting something for nothing. If the amount of money that you have available for stock trading is limited investing in penny stocks could be a smart stock investment strategy for you.

For example, the recent closing price for Google was $ 438.77 per share. To purchase 100 shares you would need over $ 43,000 available. If Google went to $ 440.77 per share your total earnings on your $ 43,877 investment would be a mere $ 200 or a 0.4% return on investment.

On the other hand if you purchased 1000 shares of a stock at 10¢ per share, and that stock went to 15¢ per share, your $ 100 becomes $ 150 or a cool 50% profit. If that 10¢ stock instead went to a dollar or even $ 10.00 per share, your earnings would look awesome indeed.

You do the math.

Penny stocks often have extremely high trading volumes. When an investor can buy such a huge number of shares with $ 1,000 or $ 10,000, it can leave the volume patterns for a penny stock looking similar to one of the S&P 500. This high trading volume can also lead to very high volatility. A stock may reach an all time high and stay there for only minutes.

As with any stock, you should always do your own homework and trading experts seem to agree that if you do trade penny stocks you should probably do that homework twice. Know the profitability of the company. Be very aware of the trends associated with this stock and its industry. Make a game plan and stick to it. Buy a stock only at the price you intended to buy it and sell it at the price you intended to sell it, always protecting yourself with a stop loss order to prevent you from losing everything if the price happens to crash.

As always, never ever let emotion enter into your trade.

For some people, penny stocks offer the same excitement as of nickel slot machine. And many of these people walk away from penny stocks as broke as when they leave those nickel slot machines.

I tend to receive a lot of e-mail stock tips about penny stocks. I have never purchased a stock based on one of these tips alone. There were a couple of times when I looked into the company and it appeared that I could make a solid trade. However, my buy price never came around so I didn’t buy the stock.

As part of your all overall stock investment strategy you may want to consider putting some of your investment money into penny stocks. Keep the amount of money limited-not more than 10% of your total trading cash-and look over every stock trading opportunity with a fine toothed comb. As you develop skill and experience as a stock trader you will come to know the fact that the deal of the century tends to come up several times a day. You just have to know how to find it.

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Many people buy stocks for their dividends which is a pretty sound strategy for Self Managed Super Funds (SMSFs), especially if your plan is for your super fund to provide you with income when you are retired. In the Australian market, bank stocks were a favourite among dividend seeking investors. Many financial planners were advocating buying bank stocks in late 2008 because they were generating dividend yields of close to 10%. The only problem with this advice was that dividends are not guaranteed and is usually a percentage of earnings. If earnings fall, dividends would typically fall as well so buying a stock simply because the dividend yield (based on historical dividends) looks attractive is not really a good idea. This certainly has proven true for bank stocks as banks have since cut dividends as earnings fell and they have also had to retain more of the earnings to provide for potential bad debts.

For me, I prefer to generate my own “dividends” rather than rely on the company to provide me with the dividends I want.

Firstly, I would look for stocks in sectors that are relatively recession proof like consumer staples, utilities or telcos rather than finance. With banks, we still don’t know the how many more loans will become bad due to escalating unemployment and business failures, or how many more new capital raising they will need to do which will dilute existing shareholders. One stock I have been watching for a while is Telstra (TLS), Australia’s largest telecommunications company. When stock was trading in the $ 3 – $ 3.30 range, the dividend yield is around 8-9%. As this dividend is fully franked i.e. already taxed at 30%, the yield is easily over 10% for SMSFs who only need to pay tax of 15% instead of 30%. Although I like the Telco industry, I have been hesitant to buy Telstra before because I did not feel comfortable with the old CEO and his management team. Though it is still early days, I do like what I have read and heard about the new Telstra CEO. A stock valuation service I use also valued the stock at $ 3.09 so I am comfortable buying the stock at $ 3.00 or less.

In June 2009, I decided to sell some Telstra Aug09 $ 3.12 put options for a premium of $ 0.20. If Telstra’s stock price is less that $ 3.12 on 27 August 2009 when the options expire, I will have to buy the stock at $ 3.12 but the net cost to me would be $ 2.92 (3.12 – 0.20) which is a price I am happy to pay for this stock. If Telstra’s dividends stay the same, I will have a return of 10% on my money which is better than current interest rates. However, I am not counting on Telstra to maintain this level of dividends even though they have done so in the past two years. As Telstra is an optionable stock, I can very easily sell call options to get this 10% income even if Telstra pays no dividends at all that year. My current plan is sell call options to generate 10% income and assuming Telstra continues to pay the 28 cents of fully franked dividends, I could get a total return of 20% or more annually.

I am also pursuing this strategy with a few other recession proof stocks like Woolworth and CSL, which are optionable. My outlook for the Australian economy for the next year is for low or no growth. Hopefully, the worst is behind us but even then, I expect company earnings, even of the recession proof companies, to be stagnant so I do not expect much in terms of capital gains for these stocks. Capital gains would be a bonus but I am banking on getting my returns from both company dividends as well as the dividends I generate myself from selling options over these stocks.

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The easiest way to derail a good stock investment strategy is to bring emotion into the game. Stock securities are little pieces of a company. While human beings are very emotional creatures, the little slips of paper that represent the countless stock trades occurring every single day have no emotion. Furthermore, large institutional investors, who have the largest influence on a stock price because of the size of their trades, operate by a series of trading rules that once again have no emotion as part of the equation.

For you and I, trading stock is partially a psychological game. It’s a battle between our ability to make rational decisions and our tendency to get caught up in emotions of fear, greed, and a desire to be right. Without some fancy neurological operation or disfiguring industrial accident, emotion is a part of the way all of our brains operate.

Therefore, it doesn’t do any good to pretend that we don’t have emotion.

Instead, learning how to recognize emotional response is the key to controlling it. This is especially important when money and tight deadlines stare you in the face. To practice recognizing emotions, keep a small journal and as you look at each stock price in your portfolio note any emotions that you feel when you first see the price. Be honest with yourself because this is important. If you a saw price drop below your buy price do you feel a pang of dread in the pit of your stomach? Do you feel yourself justifying why you bought the stock in the first place? Is this followed by thoughts of why you should hold on to the stock to prove to yourself or someone else that you were right?

Rational thinking follows emotional responses. However, rational thinking is also colored by emotional responses. This is why it’s important to recognize when you have these emotional responses, whether good or bad, so you can put yourself back on track and objectively evaluate whether or not you should stick with the stock or get rid of it.

Emotions can also play with your head when the stock is doing well. In my early days of trading I had a stock skyrocket and I was elated. I would look at that one stock and think about how it proved that I knew what I was doing. Rationally the math told me that I had already made plenty of money and it would be a great thing to sell the stock immediately and take the cash.

That’s not what I did.

Instead I rode the stock through the end of the day and into the next morning. Before the markets opened that next day, a press release had come out about this company and while the news wasn’t horrible, it wasn’t positive either. By the time I was able to trade stock that day, major institutional investors followed their standard policy and dumped the stock, driving the price down. My emotions took hold on this loss as well. To make a long story short, what would’ve been a great financial gain became a substantial loss. Institutional investors are sometimes timid about buying back into a stock and once they have started the trend that drives the price down many private investors smartly follow as well.

Looking back on this particular stock I would’ve had to hold on to it for another year just to break even.

This was a tough lesson to learn, indeed. And that’s why emotion should never be a part of your stock investment strategy.

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Diversification is the key to success in the stock market, especially given the current negative bias. Whether you buy or short, or add put and call options, the key is akin to being a good pitcher—mix them up and you increase your chances of success.

The reality is that it doesn’t matter if you are investing in the real estate market, gold, stocks, art, or antique cars; the best way to protect your wealth is not to put all your eggs into one basket. This is obvious, but I’m surprised at how few investors actually follow this.

Would you load up on all technology stocks? Going back to the baseball analogy, can you imagine a pitcher throwing just a straight fastball? Eventually it will be hit hard.

The end goal is to make money and longevity. The longer you are in the business of investing in the stock market, the more experience and opportunities you will gain.

Think about investing this way: when you are buying a stock, you are investing in a business. The people who run that business are entrepreneurs, looking to generate a return on the capital their company invests. The people who provide this capital are investors—people like you. You invest your capital because you are looking to generate a decent return on your investment.

Naturally, if you are going to invest your money in a business, you want to have some say in how it is run, in order to protect your investment. In the stock market, however, you don’t have that luxury.

You can vote for company management or some specific initiatives, but you can’t actually participate in the company’s daily decision-making. So, this means that you do not have control over a company’s ability to allocate your capital. Therefore, the only option available to you as an individual investor in the stock market is to spread your investment capital around. You need to divide your own investment risk among a number of companies, because you can’t control the actions of a single one of these entrepreneurs.

The concept of spreading your investment risk is called portfolio management—a process that encompasses the creation, monitoring, and adjustment of your investments. This process never stops, because you are continually buying and selling new stocks. Taking a “portfolio approach” to your stock market investments helps you stay in the game longer and improve your returns.

Taking a portfolio approach to your stock market holdings means diversifying the industries in which you invest. Not only do you need to spread your investment capital around a number of different stocks, but you also need to diversify your holdings across different industries. Owning a basket of stocks in one market sector increases your investment risk substantially, so you have to spread your money around different sectors if you want to protect your wealth over the long term.

In the current environment of uncertainty, you can buy selectively on weakness, but also play the downside via put options or, if you’re aggressive and experienced, take a look at shorting.

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Many people buy stocks for their dividends which is a pretty sound strategy for Self Managed Super Funds (SMSFs), especially if your plan is for your super fund to provide you with income when you are retired. In the Australian market, bank stocks were a favourite among dividend seeking investors. Many financial planners were advocating buying bank stocks in late 2008 because they were generating dividend yields of close to 10%. The only problem with this advice was that dividends are not guaranteed and is usually a percentage of earnings. If earnings fall, dividends would typically fall as well so buying a stock simply because the dividend yield (based on historical dividends) looks attractive is not really a good idea. This certainly has proven true for bank stocks as banks have since cut dividends as earnings fell and they have also had to retain more of the earnings to provide for potential bad debts.

For me, I prefer to generate my own “dividends” rather than rely on the company to provide me with the dividends I want.

Firstly, I would look for stocks in sectors that are relatively recession proof like consumer staples, utilities or telcos rather than finance. With banks, we still don’t know the how many more loans will become bad due to escalating unemployment and business failures, or how many more new capital raising they will need to do which will dilute existing shareholders. One stock I have been watching for a while is Telstra (TLS), Australia’s largest telecommunications company. When stock was trading in the $ 3 – $ 3.30 range, the dividend yield is around 8-9%. As this dividend is fully franked i.e. already taxed at 30%, the yield is easily over 10% for SMSFs who only need to pay tax of 15% instead of 30%. Although I like the Telco industry, I have been hesitant to buy Telstra before because I did not feel comfortable with the old CEO and his management team. Though it is still early days, I do like what I have read and heard about the new Telstra CEO. A stock valuation service I use also valued the stock at $ 3.09 so I am comfortable buying the stock at $ 3.00 or less.

In June 2009, I decided to sell some Telstra Aug09 $ 3.12 put options for a premium of $ 0.20. If Telstra’s stock price is less that $ 3.12 on 27 August 2009 when the options expire, I will have to buy the stock at $ 3.12 but the net cost to me would be $ 2.92 (3.12 – 0.20) which is a price I am happy to pay for this stock. If Telstra’s dividends stay the same, I will have a return of 10% on my money which is better than current interest rates. However, I am not counting on Telstra to maintain this level of dividends even though they have done so in the past two years. As Telstra is an optionable stock, I can very easily sell call options to get this 10% income even if Telstra pays no dividends at all that year. My current plan is sell call options to generate 10% income and assuming Telstra continues to pay the 28 cents of fully franked dividends, I could get a total return of 20% or more annually.

I am also pursuing this strategy with a few other recession proof stocks like Woolworth and CSL, which are optionable. My outlook for the Australian economy for the next year is for low or no growth. Hopefully, the worst is behind us but even then, I expect company earnings, even of the recession proof companies, to be stagnant so I do not expect much in terms of capital gains for these stocks. Capital gains would be a bonus but I am banking on getting my returns from both company dividends as well as the dividends I generate myself from selling options over these stocks.

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The easiest way to derail a good stock investment strategy is to bring emotion into the game. Stock securities are little pieces of a company. While human beings are very emotional creatures, the little slips of paper that represent the countless stock trades occurring every single day have no emotion. Furthermore, large institutional investors, who have the largest influence on a stock price because of the size of their trades, operate by a series of trading rules that once again have no emotion as part of the equation.

For you and I, trading stock is partially a psychological game. It’s a battle between our ability to make rational decisions and our tendency to get caught up in emotions of fear, greed, and a desire to be right. Without some fancy neurological operation or disfiguring industrial accident, emotion is a part of the way all of our brains operate.

Therefore, it doesn’t do any good to pretend that we don’t have emotion.

Instead, learning how to recognize emotional response is the key to controlling it. This is especially important when money and tight deadlines stare you in the face. To practice recognizing emotions, keep a small journal and as you look at each stock price in your portfolio note any emotions that you feel when you first see the price. Be honest with yourself because this is important. If you a saw price drop below your buy price do you feel a pang of dread in the pit of your stomach? Do you feel yourself justifying why you bought the stock in the first place? Is this followed by thoughts of why you should hold on to the stock to prove to yourself or someone else that you were right?

Rational thinking follows emotional responses. However, rational thinking is also colored by emotional responses. This is why it’s important to recognize when you have these emotional responses, whether good or bad, so you can put yourself back on track and objectively evaluate whether or not you should stick with the stock or get rid of it.

Emotions can also play with your head when the stock is doing well. In my early days of trading I had a stock skyrocket and I was elated. I would look at that one stock and think about how it proved that I knew what I was doing. Rationally the math told me that I had already made plenty of money and it would be a great thing to sell the stock immediately and take the cash.

That’s not what I did.

Instead I rode the stock through the end of the day and into the next morning. Before the markets opened that next day, a press release had come out about this company and while the news wasn’t horrible, it wasn’t positive either. By the time I was able to trade stock that day, major institutional investors followed their standard policy and dumped the stock, driving the price down. My emotions took hold on this loss as well. To make a long story short, what would’ve been a great financial gain became a substantial loss. Institutional investors are sometimes timid about buying back into a stock and once they have started the trend that drives the price down many private investors smartly follow as well.

Looking back on this particular stock I would’ve had to hold on to it for another year just to break even.

This was a tough lesson to learn, indeed. And that’s why emotion should never be a part of your stock investment strategy.

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When seeking a winning stock investment strategy, you’ll find no end to the number of tools, techniques, and processes employed by people and training companies to help you be a successful investor. Unfortunately none of these things will work without one piece of the puzzle to which everything else connects.

To be successful as a stock investor you must have a money mindset.

Watch interviews with top billionaire investor Warren Buffett. Even this expert in the stock market has trades which lose money. By and large though he makes far more money than he’s ever lost. As you listen to him speak, it’s very clear that Mr. Buffett is more interested in seeking out opportunities to create wealth than he is in whining about the times when he’s been wrong and lost money.

His money mindset is focused on the creation of wealth.

Far too many people have the money mindset which is focused on losing money.

Perhaps you experienced little voices in your head that tell you that money is dirty. You have to be greedy to make money. You have to be dishonest to make money. You’re not worthy of wealth. You don’t deserve to have money. People are out to get you and take your money from you.

If voices like these are inside your head then chances are you’re looking for reasons to validate why trading stock is difficult or why it’s a gamble or why it’s foolish or why you can’t make any money because we’re in the middle of a recession.

Keep in mind that these voices are not telling you what reality is. They’re telling you what you think is true and the activities that you experience in your life prove them right.

Before you embark on any stock investment strategy, it is absolutely critical for you to explore what you think about money and wealth. If you’re a good person now, money won’t change that. In fact having more money allows you to have some say in the good that gets done around you.

Sit down with a piece of paper and think about anything that you’ve heard as a child, perhaps from your parents and other relatives, that has somehow shaped your attitudes towards money. You may not be the best judge about how you think about money.

If you’d like an objective measure of your attitude towards money, look at your bank balance.

Next, call some friends and ask them what their impression is of you and money. You’re looking for honest feedback, so let your friends know this. Having this information is a benefit to you so don’t feel discouraged if you receive feedback that you don’t like. Perhaps you’ll feel that you have very good attitude towards money, but your friends comment about how you split pennies when it comes to dividing up the bill while you’re out for dinner. Some of your friends may notice that you’re always talking about not having any money. Or perhaps you’re always talking about how rich people are taking advantage of you or how some unseen force out there is preventing you from having the wealth that you know you’re entitled to. Maybe you believe that having money is entirely a function of luck and that you will only be wealthy if you win the lottery or when your ship comes in. These are all indicators of your attitude towards wealth and demonstrate how your money mindset is oriented.

Armed with this valuable information, choose your new beliefs. Instead of thinking that you’ll only be wealthy when your ship comes in, decide that you are building your ship. Instead of thinking that making money requires hard labor, decide that the harder you make your money work for you, the easier your life will be.

I have even met people who were born into extremely wealthy families who had somehow developed negative attitudes about money. Sure enough, they were the ones in the family who always seemed to be broke. As you pursue your desires as a successful stock investor, always keep this in mind and never discount the importance of a positive money mindset.

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Options trading is an advanced stock investment strategy, but if you learn how it works you can substantially increase the amount of leverage that you have with your money. Rich Dad, Poor Dad author Robert Kiyosaki refers to option trading as the investment strategy of the rich.

Why is this?

Option trading simply gives you more leverage.

An option is a contract to buy a stock at a predetermined price. Stocks that have options available will usually have option contracts which expire on a monthly basis. Option contracts always expire on the third Friday of the month in the contract. For example, a July contract expires at the end of the trading day on the third Friday of July.

How does this give you leverage?

Let’s take a theoretical example with a fictional company “Poodlez.” A recent close price for Poodlez (POODZ) was $ 438.77 per share.

If you wanted to buy 100 shares of Poodle, you would need $ 43,877. If Poodle went to $ 440.77 per share your total earnings on your $ 44,077 investment would be a mere $ 200 or a 0.4% return on investment.

Now let’s look at the Poodlez July option contract for $ 440 per share. Just like the stock price, option prices go up and down as well. Let’s say the July contract was available for $ 19.70 per share. If you bought this contract today you would have the right to buy Poodlez at $ 440 per share, between now and the end of trading day on the third Friday of July.

For the sake of this example let’s say that Poodlez goes to $ 470 per share. What you could then do is execute the contract with your broker. They’re setup to do this and will buy your Poodlez stock at $ 440 a share and sell it at the market price of $ 470 per share. The great thing about this is that you don’t need the $ 44,000 to buy the stock. The broker buys and sells it at the same time and you collect the profit.

By trading options you gain leverage over a stock that you possibly could not have afforded to buy outright.

There is a downside option trading.

Options are like buying ice cubes.

The moment you buy them, they begin to melt. In the above example if Poodle doesn’t go high enough between now and the third Friday of July to make you a profit, the option contract will simply expire and your investment will disappear.

A good way to think of options, if you don’t like the ice cube analogy, is that you are buying time.

While options can appear confusing they follow the basic rules of buying any stock. You’re buying a contract which gives you leverage over a stock so you should expect most of the fundamentals to be the same. This means that the research you do on a stock and its company before a trade still applies.

Investment houses usually require that you achieve a special trading status before trading options. Check with your broker to learn what those requirements are and study stock option investing as a smart addition to your stock investment strategy.

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