When setting up a stock portfolio there are things one should look into. First off, one should know what is currently happening, not only in the stock market, but in the economy as well. Researching stock indexes such as “The Dow” and the “S&P 500” will give you general stock performance. The Dow Jones Industrial Average only tracks 30 large industrial firms in hopes of getting a sense of where the market is heading. The S&P 500, on the other hand, tracks 500 stocks which may give the investor a better overall picture of where the market is going. Which ever the investor may choose to use, the idea is to find out whether stock prices are going up or down. Also important to know is state of the economy. Certain stocks tend to perform better or worse depending on the state of the economy. Knowing which stocks tend to perform well at a given state will help the investor choose which type of stock is best for the given conditions.
With that, it is time for the investor set a goal. Is the goal that of short or long term success? Is there a specific rate of return you wish to achieve? Or do you simply wish to come out ahead? Once the goals are put into place it is time for investment strategies. The investors goals will be key in helping plan the strategies for the investor.
Now that there are goals in place, it is now time to look at the many investment strategies that will help accomplish the set goals. One of these strategies is known as the buy-and hold-strategy. This strategy involves the investor to purchase a stock and hold on to this stock for many years in hopes that over time the stock price will increase. This method doesn’t require much timing of the market therefore is much less stressful making it a very desirable method. The opposite strategy is known as short term trading. This requires much attention to be paid to the “Price” and “Volume” of the stock, also knowing whether the stock is on an upward or downward trend. Another common strategy is known as short selling. This involves borrowing a stock from a broker at a given price and selling it, in hopes that the stock price will drop from the original price. Once this has occurred one can buy it cheaper and keep the difference. Also a very important strategy is known as diversification . The goal of this strategy is to insure success by investing in a wide range of stocks. For example, one set of stocks may be doing poorly while another group may be performing very well. This is known as being negatively correlated. One should take note however that more stocks does not always mean more success. An investor who has more than 15 stocks in a portfolio may be taking a risk.
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Once a strategy has been put into place, it is important to have an alternate plan of action. Because the market is constantly changing, one may discover that the investment strategies they have chosen may not be the best for the goals they set. This where the alternate plan will come in handy. Careful planning ahead of time will help prevent ones investment goals of becoming unobtainable due to a sudden change in the market.