Stock Investing in a Down Market - Success Strategies
By SmartProInvesting.com Stock Investing Team,
March 14, 2009
The stock market maintained a negative outlook this past week, closing 3.02% lower, as the All-Share Index dropped further to 20,370.06. It had opened at 21,003.42. Transaction volume and value also closed lower at 1.2 billion shares valued at N6.1 billion, confirming that buying interest remains in decline. The preceding week had closed with 1.6 billion shares worth N6.34 billion. The impact on market capitalisation was a further decline of N0.1 trillion, down to N4.59 trillion.
Obviously, not much to cheer. The bright spot, perhaps, was in the minor rally on Friday, when the index clawed up 111points (0.55%). Such reversal, suggesting a mood change, is an indication of the likelihood of a measure of rally in the new week.
It can also be noted that while the market has remained down and falling, some deceleration is noticeable. Compare the week's 3% drop in the All-Share Index to January weekly drops that ranged in the region of 10%. You begin to sense that less and less stockholders are wanting to dump their stocks at the floor prices of today. Overcoming that panic, you'll agree, is the first step to any change for the market. When the equation shifts to having more investors who are looking to buy, that will mark the beginning of a recovery process.
Talking about a return to buying positions, how do you pick stocks in a troubled market. After all, you've heard it said a few times by commentators that this is the right time to buy. So, if you have to, how do you select?
No Time for Risky Plays
Investors that want to go into the market should know that this is not the best time for risky, speculative positions. Buying stocks in a down market requires extra caution. Reason? You cannot pin down recovery. Even when one commences, the process can be strewn with several reversals. So, the risk quotient is much higher, requiring that you select carefully.
In the boom era, you probably rushed for placements on speculative basis, expecting prices to drive up at listing. Most times it did, propelled by the bullish momentum of the market. It worked if you were smart enough to dump it as prices shot up. Now the scenario is different because the market temperament is different. You may not get any sustained bull run anytime soon, so you need a more cautious approach. That calls for investing only in stocks that can relatively withstand shocks.
Stocks Good for Safe Play
So, what categories of stocks are worth considering in today's market. Here are some parameters:
- Stocks of Tested Companies
A tested company is one that has established a track record. Such companies have proven themselves with years of stable performance, posting good earnings. You expect a healthy balance sheet, with strong cash flow and moderate debt. Someone described such stocks as those that if you buy into and the stock exchange is shut down for five years, you won't loose too much sleep. Why's that? Because you can still be comfortable with the performance of your company, not just its stock. Besides, such stocks can be pushed down by the tide of market pressure, but easily bounce back the moment the market cloud lifts.
Investing in a down market requires going for stocks that you'll have some comfort with, even if the market reverses downwards. There will be time for speculative stocks, if you must buy them, but ideally, not now.
- Dividend Stocks
We've mentioned this previously. Dividend stocks are of companies that pay out generous dividend. They also usually have the earnings and cash flow to support the payout. The added advantage is that you can hope to receive reasonable dividend income, irrespective of how stock prices play out in the market. For those stocks that pay, say, 3k per share, you know the volume you must own to be able to buy just a loaf of bread off your dividend. In a bullish market, you're at least happy if the capital gain is accumulating. With price depreciating and no dividend, such stocks become a pain.
- Sector Leaders
Each sector of the market has a leader(s) that dominates it, usually taking a lion's share of the sales and earnings. Such companies are more firmly rooted, meaning that further upheavals in the economy can be better absorbed because of available capacity. When the economy is looking troubled, should you be getting into a fringe player in a sector? How soon are you sure things will be stabilising in the economy, both globally and locally? So again, you're looking for best bets and shouldn't be taking a lot of chance.
Now, don't take this to mean that any other stock you buy now will fail you. Some fringe players could turn out good buys. If, however, you desire to close your flanks and play safe, which makes a lot of sense at this point, you must select with care. Let stocks you buy meet tough criteria of quality, at this time. To get more on stock investing tips, access these stock investing resources.
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