Buy And Hold, and Stop Loss Investment Strategies
If you are new to the world of investing, it is worthwhile to acquire a basic understanding of the different investment strategies you can employ to maximize returns and minimize losses. That being said, two of the most popular strategies that investors often use in the stock market are buy-and-hold and stop-loss. Here is all you need to know about the two.
Buy and hold
One of the most preferred strategies for passive investors, buy and hold is also often referred to as position trading. As the name suggests, in this strategy, the investor buys a stock and then holds it for a long period of time in the expectation of its value rising gradually in the future. The strategy is based on the idea that all financial markets typically generate a sizable return in the long run, regardless of the fluctuations in the market. As such, an investor employing this strategy will continue to hold his stocks without being deterred by any technicalindicators or short-term price movements.
In fact, some believe that the major highlight of buy and hold is its simplicity. It implies that you continue to make your deposits without the fear of how volatile the market may be, and you will eventually emerge wealthier that you are. In addition to this, investors also believe that buy and hold is one of the most efficient investment strategies in terms of commissions and fees. The stock is purchased and then sold off only when the investor requires money. This minimizes brokerage costs and commissions.
A stop loss or stop order may be defined as a sort of advanced trade order wherein the investor instructs his broker to automatically sell of the stock if it plummets beyond a certain price. In other words, the investor specifies that he will execute a stock trade only on the condition that a specific price level is reached during its tenure. The stop-loss strategy is essentially employed in order to minimize losses in a particular trade. It can be used for both long-term as well as short-term investments.
The investor will typically pay a certain brokerage fee to his agent to carry out this stop-loss order. A stop-loss order is essentially a trading tool that investors employ when they do not want any hassles of having to monitor the security on a day-to-day basis. Since the limits are pre-decided at the time of buying the stock, the trade gets triggered automatically when the set price limits are reached. This strategy is especially useful for small-time investors who are not involved full time in the industry.
The broker will typically monitor the prevalent market bid price of a particular stock, that is the highest price at which other investors are willing to buy the stock. Once the bid price reaches the pre-defined stop loss limit, the trading order is automatically executed and the stocks are sold off.
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