OCT 8: Online Stock Trading System – The Good & The Bad

by David Jenyns on October 8, 2006

Finding an online stock trading system is vital for all investors; your gains depend on a system that works, you won’t consistently pull positive returns if follow a rag tag approach to trading. A couple of the methods below might give you some direction as to where to start with your online stock trading system.

Dogs on the Dow

Buy equal dollar amounts at the beginning at the year of the 10 DJ stocks that have dividend yields. Hold these companies for one year and adjust your portfolio to have the current dogs on the Dow”. You are actually buying good companies that are temporally out of favor and thus their stock prices are low. Hopefully they will rebound, their stock price will go up and you will obtain a profit by selling them.

The basic theory is that these are mature companies that have sufficient financial strength to overcome rough times, but of course this doesn’t happen every time so there is still an element of risk here.

Dollar Cost and Value Averaging

This online stock trading system consists of investing on a regular basis a fixed dollar amount, usually in a mutual fund monthly purchase of shares. If the fund’s price declines you will receive slightly more shares for the investment amount, and if the price is up you will receive slightly fewer. Assuming the fluctuation of the fund up or down you will lower the average cost slightly.

This strategy involves meeting a prescribed target by adjusting the amount invested, up or down. Dollar-cost averaging takes advantage of the 1/x curve non-linearity. Value averaging when the value is down goes in a little deeper and when value is up in a little less. But be careful because when you are dealing with a declining market neither approach will bail you out.

The Online Stock Trading System of Hedging

Hedging is a strategy that helps you reduce the risk of holding an investment. The simplest, but most expensive method of hedging against market risk is to buy for the stocks you own a put option. To cover general market declines, buy a put option on the market, and sell financial futures to hedge.

The best and cheapest method of hedging is to sell the stock you hold from a company to a competitor. And, futures are the cheapest way to hedge an entire portfolio, but keep in mind that the efficiency of the hedge depends on your estimated correlation between the broad market index and your high-beta portfolio.

Dogs on the Dow, dollar cost and value averaging and hedging are some of the online stock trading systems that can help you increase your profit or reduce the risks, but to become a professional trader, find a system that consistently works for you, and follow it 100% of the time.

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