Tuesday, October 01, 2013

Stock Market Investment Strategies

Stock investment strategies:  Buy and hold strategy
There are various strategies which investors apply in the stock market. There is no strategy which fits everyone’s needs since every individual has his own risk appetite and monetary limitations.
a)      Buy and hold strategy
b)      Bottom up investing
c)       Top down investing
d)      Defensive investing
e)      Dollar cost investing
f)       Contrarian investing strategy

Buy and Hold is a basic investing strategy where investors buy and hold a security for an extended period of time. It is a known fact that stocks give a better yield in the long run than any other investment avenue like bonds, CDs, real estate etc. And this principle is being followed in the investment strategy. Investors believe that if they can find a good security and keep it for an extended duration of time they will get better results than other investments. The belief is that it is better to allow a security the opportunity to grow over time, versus attempting to trade in and out of a stock for quick gains.

However, it is very important to invest in the right stock in this strategy. To do this, first the right sector or index needs to be identified. Once that is done, target the strongest securities within that index. This basic top down approach will ensure that the trader is purchasing into a stock with the greatest chance of growth potential.

Advantages of Buy and Hold strategy: There are various advantages of this investment strategy. Some of them are:
a)      Savings on commissions – Since the stock is not being traded actively, you save on the commissions which can be pretty costly. A Buy and Hold strategy can allow a trader to invest large sums of money with minimal costs.

b)      Savings on taxes – Since this is a multiyear strategy, you save on the long term gains which keeps you on lower tax bracket. This is again a major advantage.

c)       Less stress – Most investors can take it easy once they buy the stocks in this strategy. They don’t have to worry about every price movement since they are pretty sure that they will make money in the long term. This gives them peace of mind.

Disadvantages of buy and hold strategy:
As mentioned earlier, none of the investment strategies is without any negatives. Even in buy and hold strategy, there are some disadvantages. Though it looks like a safer bet, it may not give you the best returns possible. Also, bear markets are not good for this strategy since it can take years to get to a break even point. Another major point against this strategy is that you can never be sure of the stocks you have picked especially in current market when a lot of blue chip and reputed companies are going bankrupt overnight.