Trading in Stocks

For an investor to survive the rough tides of the stock exchange market the investor should first establish an investment policy. Investment policy is a plan of action or a statement of ideals. This plan should have specific objectives regarding the return requirements and the risk tolerance. This means that the investor should determine or forecast the level of returns he expects on his principle once invested before choosing the stock. An investor should generally seek an investment strategy that provides the highest possible returns within the constraints of time, capital, and risk level among other important variables.

Stock selection is more important than timing the price swings. Wisely selected stocks have been found to be appreciating assets that most often offset the hurdles of inflation whereas cash has been a depreciating asset since its introduction. Private investors should focus upon one main approach. Basically there are three approaches to investment and an investor should settle on an approach according to guidelines on his or her investment policy. Majority of investors are appealed to technical analysis approach where buying and selling of shares is based entirely on price movements irrespective of the financial fundamentals of the companies in the question. Investment gurus shun this method because substantial proportion of gains is lost in form of commissions.

Great investors like warren Buffet combine both the growth share approach and the asset situation approach. Both approaches are the best avenues for those investors who take investment as profession and take their time to study and identify these companies. In the asset situations approach the investor buys shares of the company whose share prices have fallen below the underlying value of the business. In this approach one is guaranteed a cushion in case of company closure because there is a security margin provided by the company trading its shares below its intrinsic value. Growth share approach involves trading on shares of companies which have the ability to increase earnings per share at above average returns year after year. The article “choosing the stock to invest in” explains why the growth share is the best approach for the private investor.

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