Effective Stock Buying and Selling Strategies - Key to Your Success - (1)

When last did you make a real killing in the stock market? Of course, there is no other way to make a good killing than by doing a transaction that ultimately earns you very good money. Stock investing has that potential to turn in unimaginable earnings for you, but that's why the investor must also be prepared for a lot of stomach-churning gyrations of market prices. Worse still, a major slip could mean substantial erosion of your principal. A knife with two sharp edges, obviously.

If you focus purely on what could go wrong, chances are that you will get seriously scared and possibly shun otherwise profitable opportunities. Fear has long been identified as one enemy that could undermine anybody's progress, able to freeze the victim into inaction and failure. When you desire to succeed, you must learn to deal with the debilitating effect of fear. For stock investing, I think it's better to let the high returns potential motivate you, which now leaves you with seeking ways to contain or mitigate the risk. One good way to boost your chance of averaging out on a high note is by tweaking your buying and selling strategies to effectiveness. Indeed, when you achieve a lot of success with those two, there will be no stopping you.

Buying on Purpose
To buy successfully, you need a buying strategy. At the root of that strategy will be to buy with a purpose. What this requires is that you appreciate what value buying right can bring to you and so inject some effort into planning your buying process. As you read this, do you really have a clear idea of the kinds of stock you will be ready to put money into? Do you have a set of buying criteria? Is there a system you apply to determine which stocks qualify to be part of your portfolio? When you want to buy a particular stock, will you be able to state some good reasons why you view it as a good investment?

There is a problem when investors merely buy what others are buying. This usually follows some level of market noise about the stock, possibly because of a period of sustained price gains or some rumour of bonus issue. The danger, though, is that some investors come into a stock too late. Some may not even understand the dynamics of the price run. Their fate may ultimately be that they run into a retreating bull, on the downside of its peak, just after they have bought. Doubt it? Check this example. After Nigerian Breweries rose to as high as N130 in June 2004 following the one-for-one bonus issue and a N1.10 cash dividend, it got marked down to N64.45 by 10th June 2004. In the following days, however, it resumed its upward run, getting above N79 before losing steam and gradually sliding down. That stock has since hovered in the N30 - N40 region, leaving anybody who bought at ex-div price of N79 with nearly half the investment gone. If he stayed locked in ever since, that completes the picture of an investment misadventure. The following guide will help you buy right:

• Invest Long-term and for Value
  That's really the true investment. Short-term plays are more of speculation. Investing long isn't to say you shouldn't sell when market factors or other variables dictate that you sell, but it is not like buying now to sell in one week or even month. When you invest with a long-term perspective, it requires that you evaluate your targets very carefully. If you can't hazard a strong opinion on the direction of a company over the next few years, not to talk of several years, why put money into it? Hoping to run in and out of stocks that you cannot pinpoint their strength amounts to gambling with your investment capital.
• Select Market Sectors to Focus on
  Not withstanding that our stock market is still viewed as shallow, it currently boasts of some 32 listing sectors. Do all of these sectors fit into your investment framework? You could do better focusing on fewer target sectors, cultivating more insight into their operations and being in a stronger position to identify quality buying opportunities that arise. Even within a sector, you can narrow down on companies you really want to track. Note that the larger the number, the less you are likely to give adequate attention to individual companies. Yet, not all the companies will matter at the end of the day. The upshot: narrow your focus, depending on criteria that matter to you - examples: sector leaders, growth companies, small cap, etc.

• Aim for a Strong Portfolio
  Don't be carried away by the current performance of a company or sector and possibly reason that you should maximise returns by putting all your money into a stock or even sector. The market has one confirmed feature: change. Even the most bullish price run will not last forever. To worsen matters, change can come just too suddenly. One negative development could mean that no reasonable investor wants to put money into a particular sector or company anymore and everybody wants to sell off their current holdings. The consequence is clear: a free-fall of price. Does a strong portfolio require owning in every sector? No. Do you have to own every stock in sectors you zero into? No. You need a blend, all the same. Sectors that are negatively correlated - not driven by the same factors. Stocks of different classifications. Some that are rock-solid, maybe. Some that have strong growth potentials, maybe. Some under-valued stocks, if any. Simply put, the core of your portfolio should consist of some financially strong companies, some above-average earnings ones, some growth companies and some high-dividend (cash and/or bonus shares) paying ones. Including other classes of assets - bonds, real estate, etc - rounds off a portfolio that can meet a lot of challenges. It's not about maximum short-term returns, it's about optimal returns in the long-term. There, returns and safety blend.
• Apply Solid Selection Criteria
  Following from the last point, you need strong stock selection criteria. Earnings is always important. A company that has not reported strong earnings for some years or the most recent quarters must have something else special to offer to attract your interest. Earnings growth is as important as the absolute level. If quarter-to-quarter earnings are growing at a strong rate (say 25% or more), that's a good indication of improving performance which should ultimately boost returns and share price. The earnings profile has to be a reflection of a strong sales revenue capacity, which should also be growing (exceptional items that are nonrecurring can boost revenue, but this doesn't translate to underlying revenue strength). Management efficiency will also reflect in good margins, a pointer to better things to come. Growth companies are re-investing, researching and expanding and may not have excellent current earnings growth. However, other factors like unique product advantage, growing market dominance, etc, can still make the company a good target to invest in. While market-timing may be a successful strategy, especially for stock-traders, acting on the strength of a company's fundamentals is still your strongest weapon for long-term success.

Wait for Your Harvest
When you invest in companies that are carefully selected on the basis of their sound fundamentals - strong financial standing, above-industry-average earnings track record, growth potentials, quality management, sound business strategy, market-leading product portfolio and any other unique competitive advantage - you only need to give it time to turn in the returns you desire. Sure, you should never sleep: something can always go wrong with a particular investment. You need to keep tracking, and where necessary, re-balance your portfolio. But if you have done your homework, you reward should come. You only need to aim to sell well. That will be the focus in the next part.

For now, buy right and be calm. Your harvest will come.