Stock investment strategies: Can they make a difference?

Following The Stock Market Timeline Through The Great Recession

The past twelve years have made successful stock trading difficult and many stock investing strategies obsolete for most people: a quick look at the chart of the Dow Jones from 1998~2010 reveals only part of the reason why.

Let’s face it: It’s been a Roller Coaster Ride for most Stock Investment Strategies


Chart of the Dow Jones Industrial Average: 12 years

Summary 1998 ~ 2010

In January 2000, the market peaked and started sliding as the Dot Com Bubble came to an end in panicked selling as the air was sucked out of those stocks. But it wasn’t until the last quarter or 2001 when the Dow Jones hit its first of four troughs at around 8000 points that many stock investing strategies came undone.

In March 2003, we then saw a bull market that ran the stock market index from just south of 8000 to a peak of 14093 in October 2007, a rise of almost 75% or more. But of course, that represented a double top, indicating markets had nowhere to go but south.

Within 2 years, the market had headed south of 7000 as institutional sellers flooded the market with sell orders and found few buyers. Prices plummeted to a 12 year low before rebounding as the fear subsided, and confidence returned.

With 20-20 hindsight, those doing successful stock trading or stock investment strategies would have made a killing. Would have. Why didn’t we? In truth, volatile times make certain types of trading more profitable but wipes out portfolio values where more traditional buy and hold investing approaches hold sway.

For those investors tossed by the waves of uncertainty, buying high and selling low has only compounded the difficulties of their portfolio surviving the unsettling storms of the times.

A Personal Example of My Failed Stock Investment Strategies

During this twelve year stretch, my own portfolio invested soared to over $21,000 then dipped, then climbed again before falling back to only 1/3 of that amount. Right now, it’s treading water at a little more than 54% of its high point, and I’m sure that total performance has been much worse.

Many investors also saw their portfolio value in the money and on sale during these ten years, and it didn’t help a lot seeing the hard-earned savings disappearing in a puff of virtual smoke. I know. I’ve been there.

What’s your excuse?

And, like me, you’ve probably been either too busy or too scared to know what stock trading to do during these volatile times in the past ten years. Too busy because your career or profession precluded you from taking the time to really study your investment strategy; too scared because, if you were at all like me, you found out that stocks can really go to $0. Thanks, AtHome.

I’ve been writing about stocks, personal finance, and stock investment strategies for more than four years during this time, and I’ve tried to get a handle on the basics. That combined with extensive reading and owning my own business have helped me to focus on the real essentials of investing.

And yet…

… even now, I’m convinced that if you (I?) can manage successful trading stocks, then you will find that they are a rewarding part of your investments for the long term, whatever trading style you choose to adopt.

However, for many people, stock investment strategies are like a lottery: you buy a stock because you like the stock name, the product or the boss… but very often there is no real rational between the purchase of these stocks. In the end, it’s a lottery. But it needn’t be that way, if you know how to …

Choose your stock investment strategies

Broadly, stock trading strategies can be divided into those bought after a technical analysis of the stock and those purchased as the result of a fundamental analysis. So what’s the difference?

Fundamental analysis is usually based on analysis of historical and present data, with the aim of trying to determine both current and future value of the stock. Assessments of stocks using this means are a favorite of investors like Warren Buffett; and are often used to determine whether the actual or ‘intrinsic’ value of a company is currently undervalued or fairly-valued or over-valued.

As an example, looking at the chart above, you may determine that dow jones stocks were somewhat overvalued prior to 2008, but were on sale during much of 2008-9.

Technical analysis, on the other hand, looks at the future direction of stock prices through the study of past market data, especially pricing and volume. While there are many schools of thought, the general goal is to determine the direction and strength of a future stock price by looking for patterns in the stock price movements.

A quick look at the chart shows in 2007 a double top pattern, where the index twice reached a high of around 14000, and to technicians as a bearish signal in the market.

My Own Experience

Over the past twelve years, I’ve had some wonderful successes and abysmal failures in stock trading, all of which I will be happy to share with readers of Successful Stock Trading!

In time I learned from my many mistakes and became a better at stock trading. I also discovered other reasons why stock trading is such a great investment vehicle. One of the ones that occurred to me recently is that there is a…

The Stock Market Reaches Into Everyone’s Lives

Though there is risk in stock trading, “Yes, I do love the risk,” there are a few other things that I enjoy about trading as well, such as how the stock market seems to impact everything in our daily lives; and how everything in our daily lives seems to have an impact on the stock market.

Think about it…

…every day you spend money. Everyone spends money differently than the next person. And everyone spends it on different things. The one thing that unites our spending is…

…you guessed it, the stock market. So, next time you pull into a gas station or are at the check out line at the grocery store, think to yourself how your purchase will affect the stock market and how the stock market affects the product or service that you will be purchasing.

There is Risk

With each different type of trading, there is a different amount of risk. When you buy a stock long, you can only lose the money that you put in. There is a little bit more risk with selling short.

Buying Short and Selling Long

Even with that risk however, I have come to prefer (along with many others) short selling. There are two reasons why I prefer short selling. The first is that stocks can go down faster than they go up.

The second isn’t necessarily a preference to short selling. I just like to know that I have the option to make money when I think a stock is going to go down. And not just when its going to go up.

So, with buying short and selling long there is not much risk. However, with more advanced trading strategies you will encounter more risk. So, you should be comfortable with the basics before you dive in to these other methods of trading.

The other advanced forms of trading that you may want to check out when you master the basics include stock options and buying on margin.

Stocks, Options and Margin

Investing in stock options is a more advanced form of stock investment strategies. Individual investors issue options and other individual investors purchase them. The issuer is betting that a stock will do something and the purchaser is betting that it will do the opposite. This is a very lucrative investment strategy but one that takes lots of practice to master.

Finally, buying on margin. This is as simple as it sounds. Buying on margin is when your borrow money from your stock broker in order to purchase more stocks. If you borrow money elsewhere, say a bank or a friend, it’s pretty much the same thing. And it is just as risky. Of course, like with any time you take out a loan, you will want to get the best rate possible.

A Solid Investment Vehicle

Win the lottery and people will most kindly inform of all the ways that you could invest your money. There are many different legitimate investments, lots of stock investing strategies and not a few that are shady. But, I have come to find that stock trading can be one of the most rewarding and educational ones you could pursue.

How Are After Market Stock Prices Influenced?

Available To Everyone

You can view and trade after market stock prices shortly after the market closes until quite late or you can start earlier than the market opens. However, there are a few things you should know first. You are, as a public investor, capable of trading on these networks if you know how.

There are different networks that you can trade on at this time. These are called ECNs, or Electronic Communication Networks.

After Hours Stock Prices Influenced By Fewer Investors

After hours stock prices do not act the same way as stock prices during regular trading hours. For one thing, they are more volatile, and spreads widen dramatically, especially in stocks with very low trading volumes.

As a result, trading after hours is usually done only by professionals and high net worth investors.

There are many fewer investors on these networks than during the day time. If you are familiar with how trading volume determines volatility and price spreads, the after market action will be quite clear to you.

Impact on Demand and Supply

With lower volume (less traders), there is naturally less demand and supply for any stock you are considering investing in.

You may be trying to sell a stock at $5.20. But the most anyone is willing to pay is $5.00.

In this case, it will be harder for you to sell your stock. You may even go till the next day before you can sell. This is another influencing factor you should be aware of when looking at the value of after hours stock prices.

So, say you give in and sell your stock at $5.00. You would have normally gotten $5.20, your asking price.

Wide spreads DO make a difference

This is not a large spread. But at times, it can be up to a few dollars difference. Imagine many of these trades being placed. With more trading comes more influence on stock price.

This is why after market stock prices tend to be more volatile, less liquid, and have greater price gaps.

I have just skimmed over this topic. For more information, check out my article on extended hours trading of stock.

Kids Stock Market Education Can Be Fun?

Start Kids Young

Kids stock market education should be taught, beginning at an early age.

The stock market may seem too advanced for your young one. But as with anything, the younger your start the better you become.

You will know whats appropriate for your child. His age and understanding will pay an important factor in determining this. Many children would rather play video games. But, it is your job to make it interesting.

Make Financial Education Fun

Kids stock market education should be fun.

Good news, this is not too hard. There are just a few basic things you need to understand.

Find a system and stick with it. This is just like with basic parenting. So, you already have the basics down.

Kids like games. Make learning a game. Put them in competition up against their friends. They will be doing it for the prize and you will be doing it for they’re future.

Create The Rules And Stock With Them

All kids stock market education games need rules.

Start by telling your kids to pick a stock. This can be done online through paper trading. They can buy stock long or short stock. You may want to stick with buying long till they get that down.

You can put them in competition up against they’re friends and siblings.

Be creative. Kids get excited about small things. So, you can give them rewards such as games, special trips (mini golf, chucky cheese), or cash.

You know your kids better than anyone else. So, play to your kids’ attention span in a way that they don’t loose focus.

Getting The Knowledge Snowball Rolling

Now begins the learning part of kids stock market education.

After you have a system set up, you can start from the beginning teaching them actually which stocks to buy and which stocks to short.

Kids learn about things that happen in the real world. If not on TV, then at least in school. Since most things that happen in the real world effect the stock market, this can be a good learning experience.

You can talk to your kids about current economic events that they would be interested in and how they relate to the stock market.

More Advanced Investing

In time you may want to introduce your kids to technical analysis, which is my preferred trading method. Technical analysis is the other way to research stocks.

With this technique, you strictly focus on the stock chart. You can overlay it with indicators and oscillators. But, you will want to start with the basics: price, volume, and long term moving averages.

Remember, start early. Create a game that works for you and works for your kids. Then stick to it.