Maximize Stock Investment Returns: 2 Key Strategies

A stock investing system is used by investors to maximize profit potential and minimize risk. These systems have different names such as program trading, Forex and other similar terms. They are designed to assist an investor by providing information and setting up parameters for trading.

The stock market changes in value constantly during the course of the trading day. Daily trading highs can immediately eliminated by adverse economic news that is broadcasted on the trading floor. These changes can have an impact on your gains without a system in place that can react to market changes and take the appropriate action.

It should be noted that all investing involves risk, including the potential that you will lose the principal value of the investments in your stock portfolio. No system can guarantee a profit or completely protect you from loss. Below are a couple of tips regarding stock investing systems that will help you weather the daily market volatility and maximize your potential gains.

Set Limits

Many stock investing systems are programmed to allow you to set limits on the amount of profit or loss you will receive on a position. These profit ceilings and loss floors are designed to protect you against wild upswings and downturns that occur in inter-day trading.

A ceiling sets a price that represents the maximum profit you are willing to accept for the position. Once that price is reached, a notification will be sent to allow you to decide whether to sell the position or keep it. The sell transaction can also be automatically set in order to remove emotion from the investing decision. The floor works oppositely. When the price of the stock falls to a predetermined level, the system will sell the position. Presumably, your floor and ceiling should be set at or above the purchase price.

Advantages

Limits remove the emotion from investing and allow you to concentrate on researching new investments and monitoring other aspects of your account.

Disadvantages

You may be forced to empty a position you like due to the ceiling/floor limit you set. This means that you could pay a higher price to re-establish the position later on.

Use Hedge Strategies

A hedge strategy involves the purchase of an option contract as part of the system in order to protect against losses that may occur when the market is down. Hedging involves the purchase of a put (the right to sell stock) against a long position and the purchase of a call (the right to buy stock) against a short or sold stock position.

Advantages

Hedging protects you against losses and helps you maximize your profits. The system can be designed to automatically exercise the option when a limit is reached in order to cap losses or allow the contract to exercise worthless.

Disadvantages

Hedge strategies are purchases, which mean that you have to reach a breakeven point in order to recover the cost of the hedge.

The use of a stock investing system may be of value for certain investors, particularly those starting out, in order to eliminate emotion and maximize profit potential.