In the stock market, it won’t be enough to simply buy and sell the shares every time there is a change in the price. There should be a plan and a strategy in order to make sure your investment succeeds.
Regardless of what some investors say, there is no clear formula that can predict if a stock will be successful in the future. While we have already covered the different ways to study stocks in the previous article, there are lots of things that cannot be measured. This creates the risk that is a characteristic of the stock market.
In order for people to minimize these risks, different techniques have been created over the years. Here are some of them:
This is a strategy that attempts to take advantage of even small changes in the price of the stock. When a stock has become profitable, the investor then sells it. For example, you buy a stock of Company A at Php 50. Then, at the end of the day, it rises to Php 55. You will then sell the stock to make a Php 5 profit. This may be small, but repeating this over time has the potential to make large profits.
This is one of the most famous investment strategies. Many believe that it is easier to time small increases in the prices of stocks rather than large ones. However, this can be tiring — “scalpers” usually make up to 200 trades in a day.
When scalping, it is important to not be “greedy”. This is an advice that you will often hear from experienced investors. In this case, being “greedy” means trying to wait until the price of the stock grows higher.
This was one of the first lessons I learned when trading. I waited for a specific stock’s price to go up, only for it to go down lower than when I bought it. I would have gotten a profit had I sold it when I first saw its increase.
This is a strategy that goes against the common sense rules of the stock market. Usually, investors buy the stocks when the price is falling, and sell them when the price starts increasing (just like scalpers).
However, faders buy the stocks when they are increasing, and sell them when the price is starting to fall (the exact opposite of scalpers).
Because of this unusual process, fading is very risky. It is only for those investors with a high “risk tolerance” (those who can afford to lose a lot of money in the short term).
However, it has two advantages. First, it does not need any difficult analysis. Second, faders can gain good profits, if they are successful.
3. Daily Pivots
We have already mentioned that the stock market changes often, everyday. The daily pivot strategy aims to buy stocks at the lowest price of the day, and to sell at the highest price of the day.
For example, the stocks of Company A is normally at Php 40. Towards the afternoon, it goes down to Php 37. This is the time for you to buy.
Then, let’s say that before the stock exchange floor closes at 3:30 PM it goes up to Php 50. This is the time for you to sell. But then again, we cannot predict when or what time the value of the stock will go up or down.
Investors who use the momentum strategy usually keep a close watch on news about the different companies they are thinking of buying. When they receive positive news or see a strong movement towards the company (such as lots of investors buying the stocks), they see it as a sign to start buying stocks as well.
Momentum investors will keep the stock, and then sell it when the price starts to go down. This relies on careful research and instinct, so it might not be best for beginners.
The strategies that I mentioned above all fall under the category of “short-term investments”. This is because the investor does not hold the stocks for long, selling and buying when different signs appear.
There is a completely different approach that many experienced investors consider to be the best — long-term investments. In practice, an investment is considered “long-term” if the stocks have been kept for more than a year.
Usually, long-term investors never sell their stocks, only doing so when they are already retiring or when they really need it for large financial emergencies.
The idea behind the long-term investment is the fact that the stock market has always kept on rising every time. This means that the stock market today is still very much higher than the stock market before.
A good example was the global financial crisis of 2007 to 2008.
It is important to note at this point that a person does not really lose money in the stock market unless he sells his stocks at a lower price than when he bought them. During the crisis, many people hurriedly sold their stocks, hoping to prevent further loss. They were thinking that the stock market of tomorrow would be much lower than today, so they would lose more money if they waited before they sold the stocks. As a result, many people sold their stocks lost their money.
One of the characteristics of the stock market is its ability to go back up after falling. This is a general rule, but of course individual stocks may perform differently. There are still some stocks that have not fully recovered, but as a whole, the stock market has rebounded.
Those whose stock market portfolios are well “diversified” (i.e., they invest in multiple types of stock) still have the chance of profiting from the recovery despite the initial loss due to the process.
Other Investment Methods
Earlier, we already talked about the two most common strategies for investing. They are the short-term and long-term investment strategies. We have also mentioned a few common types of short-term investment tactics.
Aside from those, there are also two different investment methods or “styles” that one must be aware of. Remember that these methods can be directly connected to the risks and rewards that an investor may gain.
Choosing the style that is best suited for your needs and personality is a key requirement.
This is an investment method where the person chooses his stocks based on a specific “theme”. It requires that the investor is aware of the many things surrounding the increase and decrease of the stock market.
For example, a top-down investor believes that recent events will cause the economy to rise. Due to this, he will buy stocks from different segments of the economy (from the food, communications, infrastructure, and technology industries, etc.).
Or, the investor may just buy stocks from a specific group of companies, such as industrial technology, which tend to perform higher than the others when the economy is increasing.
On the other hand, an investor may decide to sell his stocks when the economy is predicted to decrease. An alternative to this will be buying stocks from industries considered to be “defensive”. This includes healthcare companies, and businesses that deal in the basic commodities (canned goods, etc.).
The top-down investment style is good for those who like looking at the “big picture”. People who like to invest in a broad range of business sectors will be able to use this method effectively.
A bottom-up investor, on the other hand, will choose the stocks that he buys depending on an individual company’s performance. This does not take into account whether the economy is increasing or not.
Bottom-up investors have a few advantages that top-down investors do not have since they do their research based on individual companies. There are several instances when the business sector as a whole rises, even though a specific company falls.
Bottom-up investors will know which company they specifically have to avoid in order to keep a safe investment.
Remember that these methods do not have to be totally separate from each other. There are also those who choose to mix the two strategies together to make them more effective. Though it will take more time since you will have to look at both the economy and the company, it will also give you enough knowledge to make your investments safer.
Read the Stock Market Series:
- Stock Market for Beginners: What it is and How it works
- How to Choose a Stock Market Broker in the Philippines
- How much should you invest in the Stock Market?
- Stock Market Strategies: How to Analyze and Value Stocks
- Stock Market Strategies: How to Maximize your Profits and Minimize your Losses
- 5 Possible Risks in Investing in the Stock Market
- What you need to know about the Philippine Stock Exchange