A wise investor strategically invests money to multi-task with their money. The retail investor who is working with stocks can simultaneously put his money to work smart for him in three ways:
ā¦ Price Action
ā¦ Dividend
ā¦ Call Revenue
So, let’s take a deeper look at these ways below:
Price Action Strategies
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If investing were like a game, then the way to win is by buying a stock at a low price and selling it at a higher price, at a later date. In order to earn profits on your investment, it is often best to use these two strategies: Value Investing and Momentum Trading.
Stocks are just like other products you purchase every day. They go on sale from time to time. Value investors wait for that sale price. This makes it even easier to earn profits because stocks that are undervalued on sale, have more potential to grow.
Some stocks do not work for this strategy because they must pay a dividend. You don’t want a highly volatile stock. If it has very high price swings, then it will be tough to manage. Here comes the importance of stock research and evaluation skills to work.
The second strategy is Momentum Trading. Some investors believe that the best time to buy a stock is when it goes higher. But here, the problem is that momentum trading works best for shorter-term investors. And most of us want to work for the long-term. The more years you hold the stock, the better would be your returns.
Investing for Dividends
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In a high-tech stock trading world, investing in a dividend can be boring. But dividends can be a great income source for the long-term investor.
There are two advantages of investing in a dividend. Firstly, it gives us a stable income. However, a company may choose to pay or not pay a dividend. It’s their wish. But for a high-quality company that has a low payout ratio, there is a lower likelihood that dividends on a quarterly payment gets cut. Secondly, it lowers your cost basis for the stock that you have bought.
Call Revenue
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Covered calls are quite more complicated than the previous two strategies. If you don’t feel confident with this strategy, no need to worry. Buying a stock and collecting the dividend can still be fruitful.
Here are two concepts that are important in call revenue, these are two decisions:
ā¦ What is the strike price?
ā¦ How many months do we want our contract to expire?
Strike price
A covered call is an options contract strategy. It gives the contract holder the right to purchase your 100 shares. Now, the important thing is the strike price. The contract holder can purchase your 100 shares if it is at or above the strike price. The strike price should be at an optimum level for both parties.
Expiration date
For your first contract, you should go three months into the future. This is a good amount of time. One of the best ways to use the covered call is to collect the premium at the beginning.
Some other helpful tips
Have clear investment goals
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You should know your investment goals. They should be clear. The investment plan, the strategies used, the portfolio design, and the individual securities should be pre-decided. Many investors focus on short-term investment returns. But instead of this, you should design an investment portfolio that has a high probability of achieving the long-term goals.
Do not expect too much or use someone else’s expectations
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Investing in the long-term is not that easy. It involves a lot of things. It means creating a well-diversified portfolio. The portfolio should be able to provide you with the appropriate levels of risk and returns. This should be seen under a variety of market scenarios. But even after designing the right portfolio, no one can say that market returns would be actually good. It is important not to expect too much. It should be careful in figuring out what to expect. You need to see your reasonable rate of return, and understand your goals and your asset allocation.
Balancing the act of diversification
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The only way to create a portfolio that gives high returns is act of diversification. Often investors believe that they can maximize the returns by taking a large investment exposure in one sector. But when the market moves against such a concentrated position, it can prove to be more harmful than beneficial. Also, a point to note here is that too much diversification and too many exposures can also hinder performance. The best thing is the act of balancing the diversification. You should seek the advice of a professional expert in this area.
Do not focus too much on taxes
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Although making investment decisions on the basis of potential tax consequences is good but it is still a mistake. You should play smart with the taxes. Tax loss harvesting has the ability to improve returns significantly. But it is important to see that the cause behind buying or selling a security should be driven by its merits. It should not be driven by its tax consequences.
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Investing brings many emotional issues that can have an impact on decision-making. Do you want your spouse to be involved in planning your finances? Don’t let these questions come your way. The best thing is to have a professional expert to talk to you and guide you regarding these concerns.
Conclusion
So, here were the ways in which you can be wise enough to increase your returns. For most investors, putting money in high-quality stocks for longer duration of time, and then using dividend income, is the best way to make money and earn profit in the market. Later, once you understand the covered call method, you can significantly increase your yield.
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