Taking Advantage of the Stock Market

You might start looking for those investments that might be a great buy and start to determine your strategies for owning new mutual funds or stocks. You may have a deeply hidden desire to own stock in a company like this 64 year old client never really interested in investing any money for his future. I guess no one had explained that you could put any investment into your Roth or traditional IRA or after-tax investments. When he heard this he said, in a very mild mannered voice, "Could I own stock in Harley-Davidson?"

Being prudent and fiscally responsible we discussed what money would be used, how to choose an investment, and what exit strategies we were going to devise for his portfolio.

Step 1. Review of your finances. Have you determined that you do have discretionary income that could be used to invest? While we will discuss strategies for choosing stock and discuss when you will get out of the investment, the money will be at risk if investing is a choice you make. It is very important to recognize that there is a danger of loss in any investment.

Choosing a stock could be as simple as the client above stated, knowing about a company and wanting to own shares or you may want to do your own research into stocks of various companies or sectors. While you are looking at your stock choice you will want to read some of the newsworthy items regarding the business or sector itself. Identify problems that may have been causing the stock price to fall or to rise. Look at merger information, read the annual report of the company you are considering.

Step 2. Start to follow the stock price in the paper or online. Start to form a list of those items that may be important to you about the stock, itself. Does it pay dividends? How did the stock perform in the last period of 2000-2008? What is there about the stock that you like? Find worrisome? Has the stock been repurchased by the company recently, and why? What is the current price, etc.?

The newspaper will give you a variety of information about the company you are choosing. Compare it to other companies. Make sure you understand terminology or importance of concepts used to describe the stocks such as selling on large volume, 200 day moving average, etc. Go on-line or discuss the information with your advisor.

Step 3. Determine an exit strategy. Exit strategies are very important when deciding to own or purchase stocks. You must have a plan for buying and selling your stock. In years past investors used a buy and hold strategy that kept them tied to their investment for the long term, many years. Investing today is based on exit strategies.

Step 4. Choose an Exchange Traded Fund (ETF) or stock, decide the percentage of profit you will make before you sell it, and then sell it. Some investors think 8% over your purchase price, others 10%. But having a plan is essential. Buy and hold is not as clear an option as it once was.

You may want to choose to sell the stock if it is not growing after 3-6 months. Instead of keeping the investment for the long term, sell it, buy something else you have researched that does have better growth potential. Investors are selling to get back their profits and it may be what is hindering the growth of your investment.

Step 5. Look at opportunities to protect your profits with a stop/loss. A Stop/loss strategy will allow you to protect your profit by placing a stop(sell) to prevent a loss on your investment. You could further, protect profits by continuing to move the stop/loss upwards as your profits increase, always staying about 2-3% below the current price. If the stock begins to fall and hits your stop/loss price, it will automatically be sold. Meanwhile, look for the next stock to invest your profits.

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Irene A. Majchrzak helps people retire debt-free with a sense of well-being and the freedom to have the things they want. Get her free ebook, Debt Free to Retire, by going to debtfreetoretire.com