Investing and trading stocks is an age-long practice. Today, there are several stock exchanges, such as the London Stock Exchange (LSE), New York Stock Exchange (NYSE), and Philadelphia Stock Exchange, that attract a huge number of individuals and corporate investors.
However, the popularity of the stock market belies the returns for investors due to the risk level and volatility involved. One of the proven and most common trading methods is a retail investment that focuses on buying low and selling high.
In addition to that, this article will discuss more expert advice to increase your return when trading stocks:
1: Choose Company Investment Along with Expert Advice
The primary purpose of buying stocks is to make the highest profits. But focusing solely on the profits will cloud the reality that buying a company’s stocks makes you a part-owner. Therefore, to increase your returns on investment, you should be interested in the company operations, industry forecasts, competition, and its prospects.
This information will guide you on how to buy stocks. A business that passes your checks alongside expert advice is bound to perform satisfactorily in returns. Expert advice can be incredibly useful but do your due diligence as well.
2: Invest Consistently
Consistency works for all aspects of life, including stocks and trading. Although stock markets are famed for their volatility and uncertainty, you can beat this by ensuring a specific amount of contributions will regularly go to your account. Maintaining consistency in savings and investment grows your portfolio faster and can considerably increase your returns.
In bull markets, great investment returns may convince you that further investments are unnecessary while bear markets don’t seem to be a wise time to invest. However, faster portfolio growth is guaranteed when you invest during a bull market, while further investment in a bear market can reduce the rate of decline. In both cases, the consistent investment makes sufficient funds available for further investments.
Some of the ways to invest consistently include:
- Dollar-Cost Average (DCA): This method of investment ensures that you’re investing a predetermined amount of money at regular intervals, such as weekly or monthly. This means when the stocks are high, you’re buying fewer shares. When they’re low, you’re buying more shares. This has a counter-balancing effect between the two extremes, thereby leveling out the cost per unit stock.
- Buy in Thirds: Similar to DCA, buying in thirds requires you to split your investment into three and each of these portions is an investment at separate intervals in the same stock. The intervals could either be time or event-based.
The time-based method is the usual monthly and weekly intervals, while the event-based ones can be done with a product or business launches, such as pre-launch, at launch, and post-launch.
3: Price Action Strategies
A good investment is when you buy at low prices then selling it when the price is already high. Engaging in calculated price action strategies can help you make the best of your investment in profits by adding a plan to your trading.
Here are the two most effective price action strategies in stocks and trading:
- Value Investing: In value investing, you’ll be on the lookout for a decrease in stock value before making a purchase. This is based on the understanding that by buying lower-priced or undervalued stocks, you can make a considerable profit as its prices grow.
According to Investopedia, the best stocks should have at least a 2% dividend with a price range between USD$15 and USD$30. To ensure effective stock management and lower risks, you should also take note of the volatility of the stock.
- Momentum Trading: This strategy works depending on the existing market trend. You can then invest based on your research and evaluation that the trend will continue for some time. Maximum profits are guaranteed if you stick to the trend until the end. Use technical indicators, such as relative strength and money flow indexes, to determine your entry and exit points for specific securities.
Strategies under momentum trading include using moving averages, price-based signals, and cross-asset analysis. It’s used less compared to value investing.
4: Consider Other Options to Reduce Your Investment Costs
Investment costs such as management fees, transaction ratio, and annual account fees contribute highly to the reduction of investment returns. A cumulative of 0.5% in investment fees in over thirty years on an initial investment of USD$10,000 will result in a USD$1.500 reduction in your portfolio over that period.
To reduce your investment costs, do the following:
- Beware of avoidable fees by knowing the guidelines of your broker.
- Review your existing portfolio’s investment costs.
- Compare the current costs with alternatives.
- Read reviews before making your final choice.
- Switch from your current brokerage firm to a discount broker.
5: Invest for Stock Dividends
The stock trading market is changing with the presence of high-tech stocks, but dividends can be very beneficial if you’re a long-term investor. It provides you with two benefit options: a consistent source of income and a further reduction in the cost per unit stock.
This means that if a company pays 4% on your total stock value of USD$10,000 at USD$50 per unit, you’ll either be able to earn USD$400 in extra income each year or apply it to your stock units.
By applying the dividend to your stock units, the cost per share will reduce to USD$48.00. A pattern that can compound over time, reducing your stock cost over time.
6: Diversify Your Portfolio
Traders often overlook the importance of diversifying their portfolio due to the presence of a bull market. Bull markets, on the other hand, are known to last shorter than expected, resulting in a sharp fall in value. This sudden change can negatively affect your portfolio performance.
Diversification allows you to invest in different assets, including small stocks, foreign stocks, and bonds. The importance of diversification is due to the difference in correlation for specific asset relationships.
For example, commodities such as oil and silver have a low correlation to stocks, allowing you to increase your returns and reduce overall risk. To reduce your risk and losses in a down market, you must ensure that each of these assets is distributed into different percentages.
A possible percentage distribution is for you to invest 40% in small stocks, 30% in foreign stocks, and 30% in bonds. Doing so will help you maximize gains in a bull market.
7: Rebalance Your Diversified Portfolio
Rebalancing is directly related to diversifying your portfolio. The initial proportion you allocated in your portfolio tends to change over time, making it necessary for you to restore your portfolio to its planned proportion.
For example, your initial allocated 40% in small stocks can either grow beyond or fall below its planned percentage. By rebalancing, you can restore it to its original value. Rebalancing keeps your financial plan in view and reduces your risk in the long term. This ensures that you don’t keep gliding on the market but stick to your initial plan.
While this might limit your profit margins, it also minimizes the amount of risk you take while trading.
8: Avoid Being Too Sensitive to The Market
NerdWallet advises investors to avoid trading overactivity, which often leads to overreacting to short-term events. By focusing on share prices instead of a company’s value when prices fall, investors are bound to make impulsive decisions that’ll reduce their overall return on investment.
Instead of taking actions too early, ensure to ask questions about the cause of the fall in share prices, what changed in a company’s business operations, and how it affects your long-term projections. This can help reinforce your initial decision to invest in a company and stick with it. You must note that the short-term impact on stock value hardly affects a carefully selected company’s performance in the long-term.
9: Plan for Sudden Market Changes
Investors are often caught trying to hedge their investment risks, thereby selling themselves short in the event of a sudden fall in value. To avoid this type of mistake, ensure to document the reasons why your stock choices were great in the first place and why you would consider selling.
You can consider having an investor’s journal where you document the great aspects of the company and why you should consider selling such as the most important metrics, the determining factors of company progress, major customer losses, wrong CEO decisions, and wrong succession plans. All of these may prevent you from making wrong decisions surrounding your investment in the short-term even in the face of plunged prices.
The risks involved in stock trading cannot be eliminated, but they can be greatly reduced while you can focus on increase your investment returns. You should ensure to dig through a company’s details as opposed to relying only on expert advice.
Adopting a consistent investment pattern and price action strategies may greatly improve your returns while reducing the risks involved. Research on alternate platforms and means to reduce your investment costs. Prioritize stock dividends to reduce stock unit costs and provide an additional means of income. Combine portfolio diversification into other forms of investment and ensure to rebalance your portfolio frequently. Never be too sensitive to the market, instead ask questions about the company that you’ve invested.
Ultimately, plan for the unavoidable bad times in stock trading with an investor’s journal. Review it occasionally to determine whether you should hold on to your investment or hold on to it.