Strategies in investing in stocks are just guidelines how you may actually invest your capital wisely. They are not a set of rules to be followed totally and are subjected to changes based on your own circumstances. They are changeable and flexible.
Below are some practical strategies for individuals whom have just started investing in stocks.
1) Buy and Hold
Buy and Hold is a strategy for starting investors. It is the strategy of buying high quality stocks and holding them for the long term benefit. For most stocks, you have to monitor the stock market or at least every month, week or day. However, by using this strategy, you may not even need to monitor your stocks. Using this strategy allows one to have minimal vigilance, hence minimizes timing risk for inexperienced investors.
This strategy is so as mentioned above because the strategy involves you to buy high quality stocks and holding them to earn dividends. Usually, blue – chip stocks are bought in such circumstances due to their high degree of financial strength (including good profit margins). The leaders of these stocks normally take steps to improve their current market share and ensure long – term growth. The key factor is that the stocks in such categories have the potential to increase in value or price and pay higher dividends over the long term.
Using this approach has virtually no risk for loss of money due to the face that you are buying blue – chip stocks. Unless the company goes bankrupt, the chance of one losing a lot of money investing in blue – chip stocks is kept to the absolute minimal. Hence, this strategy is practical and safe for inexperienced investors who want to grow their wealth.
One particularly beneficial aspect of this strategy is the compounding effect that a dividend reinvestment plan can have on your return.
Definition of dividend reinvestment plan: A plan whereby a company’s existing shareholders choose to have their cash dividend payments automatically reinvested in additional shares of the company’s stocks.
This plan simply explained is the monetary dividend paid out to the investor being reinvested to buy more stocks of the company. Hence, the newly bought stocks will earn extra dividends that will again be reinvested to buy more stocks.
Dividend reinvestment offers small investors an easy way to build wealth. It works best when the company has solid history of dividend payments and steady price appreciations.
However, dividend reinvestment plans to have some disadvantages, particularly in the area of taxation. In simple terms, taxes are imposed and thus lessen your profits.
This strategy though do not allow one to make a windfall quickly, has proved to be one of the most convenient ways for small investors and inexperienced investors to get started in stocks. Investors however using this strategy must maintain a long – term view on the market.
2) Buy – Low, Sell – High
This is a strategy most people will use when buying stocks. The key point in this strategy is to buy a stock at a low price and sell it off later at a higher price making a profit depending on the number of shares you bought and the difference in the price you bought the share and the price you sell the share. The crux of this strategy however, is to make sure you buy the stock when the price is low and hoping it will not drop. In order for a higher success rate for this to happen, good analyzing of the background of the stock is necessary.
With experience, you will get better with choosing the right stock; buying and selling at the right moment. However, unfortunate events that might still occur that can totally cause you to suffer great losses.