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Saturday, April 18, 2009

How To Make Money In Stock Markets?

The million dollar question always is, “How to make money?” It’s not an easy task in the bear markets. Market strategies have to be well thought out; those that worked in the past may not work this time.

There is no single strategy that can give you profits, but a combination of tactics and ploys that will win you this ‘Investment Game’. Have a look at 10 strategies that may be used in isolation or in combination to come out with a winning plan that will make money in stock market:

Accumulate fundamentally good stocks
Thriving on chaos, it’s a panic situation and many fundamentally strong scrips are experiencing a bear hammer.

A good way to judge if the stock is under valued is if it is quoting near its 52 week low.

A stop loss at the 52 week low would be desirable to restrict downside risk.

Price Volume data
If you are an active trader and open to taking short term positions.

A thorough tracking of the price volume data will be worth your while before entering sectors and stocks where a significant rise in volumes is being accompanied by a positive price movement.

These trading calls can sometimes make you earn a fast buck.

Sell out of money calls of stock
Sell out of money calls of stock that you hold Markets are likely to remain range bound for sometime.

This strategy restricts the upside potential but generates good, consistent returns in a bear market.

Buy out of money puts and sell out of money calls of Nifty
This strategy helps to protect downside risk of portfolios when there is uncertainty about the future direction of the markets.

This strategy can also generate profits if Nifty falls rapidly and there is panic in the markets as we saw in January, March and then in June this year.

Selling calls would help you in financing the cost of the puts.

Sell deep out of money calls and puts near the expiry
Selling calls and puts which are deep out of money can provide you with a limited profit when sold near the expiry date.

Only time value exists in these options but to earn limited profit you have to block money in the form of margins and though a rare chance but you could end with an unlimited loss.

This, needless to say, is not a very good strategy for risk averse investors.

Trading in Futures
For short term and active traders it may be better to trade in futures instead of buying stocks and holding in depository account.

This is because one has to wait for delivery to come on T+2 so as to sell those stocks. Eg.

If somebody bought 100 shares of Reliance on 10th August 2008, then he has to wait till 13th August 2008 to sell them back to the market, otherwise there exists a risk of auction in case of short delivery.

Book profits, when you can
This is a bear market. Buy and hold strategy is not likely to work.

It is better to book your profits as and when you earn.

This is not the time to be greedy.

The 'Options' option
For risk averse investors it is better to trade in Options in order to minimise risk.

Buy calls of stocks or Nifty if you are bullish on some particular shares or the market as a whole in the short term.

Conversely buy puts of stocks or Nifty if you are bearish. Unlimited profits can be earned by incurring limited cost with no risk in this strategy.

Money calls and Puts
If the markets are volatile a useful strategy is to buy both At Money calls as well as puts.

Whichever direction the markets take in the short run, you are quite likely to make good returns in the short run.

Over trading can spoil the party
Do not overtrade and take extra risks. Remember cash is king in uncertain times. You are likely to continue getting panic situations going ahead, where cash can be very gainfully deployed.

Based on the risk appetite and investment capacity one may use the above in different permutations or combinations.

To conclude these strategies are not cast in stone but one has to be flexible and take into consideration the prevailing market scenario and the future outlook that is emerging from the analysis.

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