Strategies to Maximize Gains and Minimize Risks From Stock Investments
Investors have been reiteratively forewarned to judiciously single out stocks based on strong fundamentals. The aberration committed by most however is to purchase stocks that are referred to as ‘Hot Picks’ or gainers by word of mouth or information on the internet.
The fact is that the time lag between discovery of these value picks and purchase often factors in whatever arbitrage is available. Consequently, an uninformed investor buys into a stock at its peak and is disappointed on its decline thereafter.
However, if one is cocksure regarding the fundamentals and long-term performance of the stock, one mustn’t get swayed by price fluctuations. A strategy to make propitious gains from such price volatility is referred to as ‘Pyramiding’. Pyramiding is based on a concept similar to that of a mutual fund SIP or STP.
Lets assume an investor is convinced about the stocks long term prospects and upward trend. In such a situation, every price drop should be mediated as an opportunity to buy into the stock. This will lower the average price of the stock and will consequently imply higher gains for the investor on price recovery. This concept is analogous to the SIP concept.
Another strategy is to cumulate additional stocks on every rise. Although this increases the average holding cost of the share, but collates greater holdings at an average price if one is confident about the long term average trend. This concept emulates the STP concept where more funds are committed from an asset class like debt to equity when the long-term prospects of equity seem positive.
These strategies can be combined with options as well. The advantage is that even a long term bleak trend can be used to one’s advantage by accumulating puts. On the other hand on a positive trend one can accumulate calls.