Fraudulent actions like the Libor Scandal or the 2012 JPMorgan Chase trading loss, may shake investor confidence, making them uncertain whether to invest in stocks at all, and is it worth it all the risk. Yet, some lessons can be drawn from these fiascos and applied as effective security trade strategies. These are some of the most resistant ones.
Buy in Increments
Although you might often hear that you should get into the game in a big way, get the trade on, these statements hold no truth. What is more, you should never buy all at the same time, and more importantly never sell all at once. You should stage your buys and try to sell when you get the best price. If you want to buy 30,000 shares of a company, don’t rush and buy all at once, but rather buy in increments of 3,000 over time. Brokers don’t like when investors break orders into small increments, and that is the reason why many investors still act like they are making a statement. Well, it’s wrong.
Diversification Reduces Risks
The biggest risk in stock trading is sector risk. One sector may be doing greatly at one time and go down in a matter of years. Truth to be told, sector risk carries about 50% of the total risk of holding a stock. The only strategy that works for everyone, no matter if you are a beginner or an experienced investor is stock diversification.
Combining different sectors in your portfolio may shelter you from a storm in one sector. The big mistake is to buy stocks that are similar, only because you don’t now better. Although keeping your money in one sector can beat all the diversified funds if that particular sector takes off, there is much more risk involved.
Exploit the Panic
Panic is what causes people to abandon a sector once it gets crushed. Still, no one has made investment return on panic. You must control the panic, in a way that it doesn’t dictate when are you going to liquidate your stock. Panic must give a way to reason and logic. In March 2005, there was a panic in the Biogen Idec stock (BIIB: Nasdaq).
Whoever ran in the opposite direction and bought then, they could have made quick 5 points. In addition, that stock went up again and made fun of everybody who rushed to liquidate. Remember next time when a sector or stock is routed that sometimes waiting a bit can get you a better bail out price than if you joined the flight. You can use the Equity Feed platform as a useful tool for following stock price fluctuation.
Invest in Best-of-Breed Companies
Many people lost their investment because they failed to recognize the best-of-breed companies on a particular sector. Lured by the low price of General Motors (GM) or Ford (F), they missed the Toyota (TM) which is taking share of the market and making big profits. In a similar way, Whole Foods Market (WFMI) is the jackpot in its sector, but many investors are still drawn to Safeway (SWY) or Kroger (KR) which are inferior companies. There are many more examples and all of them are the result of thinking that in the end you would get less if you pay up for the best of breed stock.
The truth is that a more expensive stock investment always bays back.