Anyone who is wanting to make money in the Stock Market today is going to need to learn some Stock Market Strategies. Its unrealistic in today’s market environment to use the old “Buy and Hold” Strategy and expect good, consistent results. By laying a solid foundation with a Stock Market Education and applying sound investment strategies you can increase your chances of success in the stock market.
Like Warren Buffett, you need do your due diligence before you invest your life savings, as doing your homework up front and learning some specialized knowledge, can really stack the odds in your favor.
Stock Market Strategies and Managing Risk
Whether you are trading Stocks or Options in the Stock Market, its important to be aware that there is an element of risk involved. Each and every stock can fall in value, just as easily as it can rise in value, and therefore you must be able to accept the risk of any position before you enter.
Each of the Stock Market Strategies I mention below bring different Risk and Reward, and you need to ensure they fit your comfort levels or trading plan.
Stock Market Strategies
Without going to great detail of each of these Stock Market Strategies, I’d like to point out what each strategy offers:
Long or Short Stock
Going Long on a Stock, is the strategy that most people are familiar with, and simply means that you are Buying a Stock with the view that the stock will rise in value & eventually sold at a higher price. Stocks have a 1:1 leverage, so for every dollar the share price rises so does each of your shares eg. 100 x ABC shares @ $20 rise to $21 = $1 x 100 shares = $100 rise in value.
Shorting a Stock is a strategy that many people aren’t aware of, it simply means you can Sell a Stock before you actually own it, with the view that the stock will fall in value, & eventually bought back, covering the short at a lower price. This means you can now also make money with price on the way down.
Protective Put – Insure your Shares
If you are Bullish on a Stock you have purchased, but are concerned it may fall in value, then the Protective Put Strategy is for you.
You can protect the value of the stock by purchasing a Put Option, in the event the Stock price falls. If the stock price falls, the put option will increases in value, which offsets the loss in the stock. You can think of it like taking a Insurance policy, and as such is one of the safer strategies. Once you overcome the relatively small cost of the put option to begin with, this strategy has unlimited reward potential.
This strategy is great for taking most of the risk out of any stock position as you enter, or maybe you want to carry some profits over to the next financial year, or you simply don’t want to worry about your position when away on holidays. Either way its a very useful tool to assist your Stock Trading.
Covered Calls – Rent out your Shares
The writing Covered Calls Strategy, is like Renting out your Shares, and is a great income generation strategy.
This strategy is a neutral to mildly bullish strategy, which is one of the safer option strategies with a higher probability, but limited reward. Typically you can receive 3-12% income per month, for writing & selling a Call Option against stock you already own.
A basic example of this is: In May you buy 100 x ABC stock @ $67 and you write the June 70 Call Option for $3.50 (so you collect 100 x $3.50=$350).
If the price rises above the $70 at Option Expiration, you will be forced to sell the stock at $70 each($7000) and you keep the $350, which is about 9% income for the month, not bad huh!
If the price remains below $70 at option expiration, you get to keep the stock and the $350, and you can rinse and repeat the process next month. By collecting the $3.50 income for the month you have effectively written down your break-even cost on the stock to $67-$3.50=$63.50. So if the stock price goes nowhere over the month, you still collect the $350, now that’s pretty cool don’t you think.
So there you have it, 3 cool Stock Market Strategies to help you towards your own stock market success.
Cade Arnel
Trend Hunter
www.globaltrendtraders.com 2009-2010
Im a newbie to learning about the stock market so i love learning everything i can! thanks for all the information.
Understanding stock market strategies which limit your risk is a great way to protect your capital. Covered calls are a great way to get started as they are actually ‘safer’ than simply buying a stock. Although your upside is limited you are guaranteed a premium each month (which can be sold before expiry if the market dips). Puts are also a great way of giving you piece of mind.
Hi Cade,
I’m just learning to trade options so understanding stock market strategies is an important topic for me. Knowing you can make money if the market goes up or down is only half of the story – you can also lose money if the market goes up or down. So putting in protection strategies, like the protective put strategy you mention, is important.
Hi Cade,
It is definatly important to have some good stratergies to stick to when you enter the stock market. It is one of the things that seperates the traders from the gamblers.
One of the hardest things to convince non traders of is that the risks involved in trading can be greatly reduced and in some cases almost eliminated by applying the correct stock market strategies.
Great blog. There are so many strategies to chose from these day but I believe the ones you mention are some of the best. A good stock market education, a simple strategy and compounding over a few years, that’s a winning combination.
Love the covered call.
Scott.