2009 was a surprisingly great year to invest in the stock market. Even though we were still deeply in the recession, the stock market rebounded 30%, 40%, sometimes even 60% at a time. In times like that it's fairly easy to make money... what happens though when times are tough and the stock market is down?
2010 has started off rocky, to say the least. It looks like the stock market is going to be tough to invest in all year long. That doesn't mean you can't make money, even in these bad times with the recession still raging on and unemployment seemingly climbing forever to new highs with no end in sight.
Today I'm going to talk about how to make money during good stock markets and how to make money during bad ones.
No matter what kind of market you are trading in at the moment, good or bad, it is very important to have rules about when to buy stocks and when exactly to sell them. Make sure these rules are very strict and make sure that you fallow them to the letter. Having a strategy of when to get out of a stock can make all the difference between a profitable portfolio and a disaster of a portfolio no matter what the market.
Next, focus almost completely on the company's earnings. Even in a bad market, a company might still pull through with decent earnings and that's all that is important in the long run. On the other hand if a company's earnings fall out of the sky along with the broader market, you know it's time to sell, and sell quickly!
Next look for ideal companies which are ones that dominate their particular industry or market place. I like to think of these as unregulated monopolies and they're out there so you can find them. Companies like this tend to do better when the market turns down because of the inelasticity of demand. In noneconomic terms, their customers have nowhere else to go.
Next look for companies that grow at a higher rate, generally 20% a year or more growth in both earnings and sales are great indicators. Companies like this may experience a downturn in a bad market but the 20% a year growth gives a fairly good cushion for them to draw upon. For instance, if sales drop 50%, their earnings growth may go from 20% to 10%... of course, they're still growing!
Next focus on buying stocks that are undervalued during a down market. If a company has grown 30% a year over the last five years but their price to earnings ratio is still less than half that rate, say 15%... then that company is very attractive no matter what the state of the market.
Finally, dump your stocks that report declines in earnings as quickly as possible. Even if the decline is just four a quarter, it may be an indicator of rougher times to come so I suggest you do a cut and run, and invest your money in companies that aren't declining.
So there you have several very simple to follow tips and rules that should help you make money in both a good and bad stock market.
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