Every stock investor is required to find reliable shares with potential in order to come up with an investment strategy.
In this article, we have listed some suggestions by Alvin Hall, who is the author of several financial investment books including “The Stock Market Explained” and has organized a stock investment guidance program called “Money or your life” on BBC, including centralized investment, investment category diversification, making decision on whether to buy and sell or to buy and keep the share, reasonable retreat and learning to average prices. We have also included our comments regarding these suggestions, and we hope that they will help you in planning out a suitable strategy of your own.
As you step into the stock market and make your first purchasing orders, it is recommended that you have a reasonable border. As there are too many shares, it is impossible for one person to know them all. Therefore, it is crucial to focus on those fields about which you have a thorough knowledge and in your opinion is potentially beneficial.
The next step is to find stable companies that excel in those fields and have ideal fundamental financial indexes to buy shares at a moderate price range and patiently keep them if they show long-term potentials.
It is unnecessary for you to buy too many shares. Expert investors tend to advise you to buy shares from a maximum of 5 to 6 companies; the more shares you purchase, the harder it will be for you to track and manage them. After a year, if any company shows signs of inefficient business, you can just replace the shares of that company with those of another company.
Centralized investment tends to result in long-term success. This is what Warren Buffet has done and made millions of dollars with. It may sound simple, but in order to perform this, you will need to have discipline. Otherwise, all investors would have been “Buffett” by now.
Another familiar market approach is to diversify your investment category. When purchasing shares of a company, there are two types of possible risks that you may face: the company risks and the field risks.
The company risks may appear as the company goes bankrupt, while the field risks may come up when the field itself collapses. For example, if there are too many cement factories, it will become redundant and thus leading to a price reduction These types of risks may be avoided via diversification.
You will reduce the possibility of facing risks by purchasing shares issued by companies in different fields. Currently, the Vietnamese real estate sector has become less promising; and those who only purchase real estate shares are likely to face field risks.
It is also advised not to purchase shares of companies which are similar in some ways or work in the same fields, such as computer hardware and software; retail and fashion; real estate and construction, etc. as the collapse of one field may lead to that of the other one.
If the shares you purchased show potential, you need to keep them and wait for them to go up in prices. However, it is still necessary to keep watch, as one day you will eventually have to sell them.
To buy and keep is completely different from to consecutively buy and sell, and it is also considered to be much more profitable. In the long term, the stock market will go up. In fact, the Vietnamese market, which is a newly-risen one, always develops despite fluctuations similar to those of other markets.
Surfers, or those who keep constantly buy and sell, are more likely to suffer from losses as they always try to be smarter than the market, to forecast when the prices drop to the lowest to make the purchase and when they rise to the highest to sell. How are you supposed to outsmart the market? The rise and fall of the prices of goods are heavily based on the decisions made by thousands, tens of thousands, or even hundreds of thousands of investors, thus making them unpredictable.
Moreover, as they surf, investors tend to make mistake due to continuous monitoring of stock prices, which may make them overhyped, resulting in orders made without proper consideration, such as deciding to sell as the market goes down and to buy too many as the market shows positive signs. Emotion is always a hinder to business.
In addition, each time you decide to buy or to sell a share, you have to pay the transaction fee and taxes, which you may reduce by keeping your shares.
Another important suggestion that investors should take into consideration is to know when to retreat. During those years in the past when the market continuously went down, if some investors had decided to withdraw their money sooner, they would have lost so severely. Even after the prices had gone down to an extreme level, they still decided to keep their bought shares in the hope that the market would recover and at the least, they would get the money used to purchase those shares back. Those who purchased the HAG shares back then when the prices were high and tried to keep them when the prices fell have all suffered from those actions, as there are still no signs of them getting to their original prices. The same goes for some other shares.
For example, in 2011, the Vietnamese stock market dropped sharply. Those who loaned money from securities companies to buy shares were all empty-handed as those securities companies sold their shares for loan settlement.
Thus, it is recommended for investors to come up with a plan to cut losses as they make their first purchasing orders. There are two criteria that need to be fulfilled, which are the top and bottom price limit at which investors should sell their shares. For example, below 8% and above 20-50% are the ideal levels at which to make a sale. Currently, on the Vietnamese stock market, many investors tend to sell their shares as soon as they get an interest of 20%, and there are those who do so as soon as the interest is 5%.
Could that strategy ensure that you will lose less money or enjoy higher benefits? It is not guaranteed. There have been instances of prices that dropped to below 10% and then bounced back up to 70-80%. If you sell the shares of Company A as soon as they drop to 8% or rises to 5%, you may lose the opportunity of earning the profit.
Therefore, the developments in the stock market are unpredictable.
The last strategy is to purchase the shares gradually, thus lessening the risks. This, in some ways, is similar to investment diversification.
If you buy shares every month with a consistent amount of money, you will get to buy shares at different prices, and you will get the average price by making a calculation based on these prices.
It is advised to purchase monthly or weekly. For example, at a consistent date of a month or of a week, you purchase the shares of company A. If the prices drop, you will get to purchase more, and you will get less if the prices rise.
This is a safe strategy for investment and is applicable to everybody. However, it is necessary to have discipline, be persistent, and not to allow emotions to control you. Several stock trading guidelines have mentioned this price averaging strategy. You should only continue to buy if the average price goes up, otherwise, losses are inevitable.
In case you need other guidelines, here is one: it is not wise to buy your shares in accordance with stockbroker’s advice. Many have done so and suffered from serious losses.
It is also ill-advised to pay attention to rumors, comments, or forecasts made by securities companies or journalists. It is obvious that relevant information needs to be paid attention to, but letting them control your actions is not recommended.
Fortunetelling is not a reliable source of information, either.
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