When investing money in the stock market, investors normally have specific goals. One is short term returns, while another would be long-term returns. Day investors usually look for short term returns by earning from the difference between a stock’s buying price and its selling price. Longer-term investors prefer blue chip stocks, which mean stocks that are stable in the long run, and from which an investor earns from the dividends that a company pays from its earnings.
To be able to maximize market return on your investment on stocks, you must be keen on observing market behavior and predicting times of stock volatility, based on different factors that affect both bond return and index return. Here are the ways to ensure that you minimize risk and, in turn, maximize returns.
- Buy low and sell high. The idea behind getting stocks is buying low and selling high. American billionaire Warren Buffet has repeatedly said this as this mantra and it has definitely worked for him. While it may be quite a scary decision, buying heavily when the market is down is a sound decision for smart investors. The saying “there is nowhere to go but up” rings true for these type of scenarios. The key here to have enough money during bear markets (when prices are low or sinking), to ensure that you have enough buying power.
During times of crisis, the values of stocks go south due to the decrease in the performance of the companies listed in the stock market. However, markets improve and economies recover, and you would see improvements in stock value and price when this happens. It may be unnerving at first, but this is a calculated risk that investors have to take.
- Look at the long run average cost. There is one good reason why financiers and investors continue to buy and buy even when the market is falling. This is what accountants call the “long run average cost,” or the LRAC. This is computed by the total purchase price for all stocks, divided by the number of stocks you hold in that particular listing. The lower your LRAC, the better. This way, when you sell your stocks, your actual profit would be the selling price per stock divided by the long run average cost. Thus, the lower the LRAC, the bigger your actual profit is, even if your selling price is less than the price of acquisition for some of your shares.
- Diversify. Don’t put all your eggs in one basket, so to speak. Even if you have millions to invest, it’s not usually a wise idea to just buy shares of stock from one or two companies. Smart investors distribute their investments across different companies. Some would even distribute their portfolio to different instruments, like bonds, options and even mutual funds. This way, you minimize your risk from losses in just one market or just one company. There is such a thing as zero risk, if you know just which investment instruments to put your money into. This way, when the value of one stock falls, the value of others might still be stable, or might even be on the rise.
Some investors would focus on just the stock return per transaction, though, such as what day traders do. This is surely risky, but if you’re out for a quick profit, then you should know how to play the game well. Many investors see the stock market as a game. Therefore, you should play it smart, and you should play it safe. Maximizing your stock return is about minimizing your risks, preferably earning good profits in the long run.
Delicious
Digg
Google
Yahoo
