Having trouble increasing your returns in the stock market? Are you a typical investor who worked hard to identify a few winners in the market only to find your profits wiped out by one bad trade? The stock investment journey can be perilous sometimes but this quick article aims to provide 3 tips to you that will hopefully help to increase your investment returns in the long run.
Focus on Fundamentals to Reduce your Portfolio Risks
Movement in stock prices can sometimes be very volatile. Sometimes a wrong bet can result in large losses within a short period of time. Most of the time, the reasons that resulted in these losses are negative news regarding the economy, industry or specifically to the underlying company of the stock. If you are a person who wants to avoid taking big risks, you should always look for stocks with strong fundamentals. Companies that have a strong brand name, stable earnings as well as a robust balance sheet can always weather the storm better than others. Therefore, the stocks of these companies will react less drastically to negative news.
Always Incorporate Some Form of Margin of Safety
Everyone makes mistakes in the stock market. The ones that tend to do better than the rest are those make less mistakes than the rest. Easier said than done you say? One way to reduce mistakes is to always incorporate some form of margin of safety in your stock buying decision. One example to incorporate a margin of safety is to only buy a stock when it is undervalued, either with a lower PE or PB compared to other stocks or to its historical averages. The idea is that when you buy at a lower relative price or at a discount, there is a higher chance that the price of the stock will drop less as compared to a similar stock with a higher price since the market has already priced in the negativity somewhat at the price that you are buying at. Looking at it the other way, there is always a higher chance that the stock will perform relatively better when the market turns around as there is more room in terms of price appreciation. Other examples include buying only when the stock is trading at its support level or finding stocks with little or no debt and is trading at a discount to its book value.
Have a Stop Loss Strategy to Minimise your Losses
Many a times, an investor makes money in the market only to lose it all due to one bad trade. This is because they do not know how to react when prices fall. Do they continue to hold or average down, hoping for a turnaround? Or do they sell too late and make a big loss? The problem is when it comes down to that, it is already too late. You do not want your stock price to drop by more than 50% before you realise that it is a bad trade. By that time you will already be stuck and any decision you make will not be the right one. Instead, you should incorporate a stop loss price for the stock that you bought at the onset such that when the price drops beyond that level, you will sell if off and realise that small loss before it gets any worse. The stop loss price depends on your own risk appetite and also whether you think the stock in the long run will perform well. Stocks with better fundamentals can usually afford to have a lower stop loss price since fundamentals will support the share price in the long run as mentioned above.
Hopefully these tips can help you to have a more systematic approach to stock investments and increase your returns in the long run. All the best in your stock investing journey!