Investors in stock market, especially the new ones, often get jittery over the stock market fluctuations and seek to build a volatility proof portfolio. For them what matters most is not that they should make huge profits, but that they should make reasonable profits without suffering losses. The problem acquires crucial significance during the times when inflation rules the roost and economy comes under severe strain.
In such circumstances, it is always advisable to look for stocks that have a competitive advantage in the market. Stocks of the companies that manufacture daily- use consumer products such as toilet paper, mouth wash, tooth pastes, detergents, laundry soaps, breakfast cereals, soda and so on generally have a greater competitive advantage over industrial products. These are staple necessities of daily use and their demand never dwindles in normal circumstances. Is any one going stop brushing his teeth, washing his clothes or eating breakfast if the economy goes bad?
It is not difficult to find such stocks. They are known as blue chip stocks. The blue chip stocks are usually owned by large manufacturing or supplying companies and they are generally the household names in the country. They make up the Dow Jones Industrial Average. Some of the well known blue chip companies include American Express, Coca Cola, Home Depot, Wal-Mart, Tesco, Proctor & Gamble, McDonald’s, Exxon Mobile, General Electric, 3M, Altria, Johnson $Johnson and so on. You can choose one or two such blue chip stocks for your portfolio.
Then there are companies, which have large share repurchase programs. Companies with large capital base such as Coca Cola and AutoZone regularly repurchase huge amounts of their own shares to sustain the value of their stocks in the falling market. This step also builds the investors’ confidence.
The basic guiding principle in stock investing is that you should invest only the amount that you can easily spare without squeezing expenditure on your daily needs. Do not spend any money into any stock if you need it soon after you invest. You should be prepared to wait for at least two to three years so as to allow the law of averages work in your favor.
Diversification of portfolio is often cited as unfailing age old wisdom. Diversification does not mean only investing in a variety of stocks, but it also means a kind of portfolio, which is comprised of both investment and trading stocks.
Both these kinds of stocks can be further diversified. For example, investment stocks can be classified as long-term investment stocks and short-term investment stocks.
Long term investment stocks have a life time horizon. Examples of these stocks are: Individual Retirement Plans and Education savings plans. Again, these plans too have different categories. For example, in Individual Retirement Plan you can open a Traditional IRA, Roth IRA and Rollover IRA. Besides these there are other retirement plans such as 401(k) or 403(b). They have their own investment options in respect of the time spans, tax benefits and liabilities.
Short-term investment plans span over considerably shorter periods than life term plans. You invest in a good value stock and wait for, say, three to four years and sell it off as soon as you have made a considerable profit. These plans are supposed to substitute fixed term deposit plans. Since there is an element of risk in stock investments, they generally yield better returns than investments in securer deposits.
Besides the investment plans, there are stock trading plans. They are not ‘plans’ in the sense that the concept of planning involves certain– usually long– span of time. They are ‘plans’ in the sense they involve building strategies to make money through quick stock trades in one day. It is called day trading. A’ quick’ stock trade may be closed within a matter of few minutes to few hours of the trading day– starting from the time the stock exchange opens to the time it closes for the next day.
It must be noted that this kind of stock trading is not meant for new entrants in the stock market. Success in day trading requires long experience, trading expertise and an intuitive understanding of the business of stock trading. You need to have nerves of steel to brave the mercurial fluctuations in stock prices and take decisions in a flash of moment. It must, however, be noted that these instantaneous decisions taken apparently on the spur of moment are generally based upon certain amount of homework and planned strategies.