If you live in a modern economy, you are probably familiar with the relevance of stocks to the modern economy. Financial news channels are preoccupied with the world of stocks despite the existence of other asset classes. The reason is that stocks are perhaps the most heavily trafficked of investment options owing much to their accessibility to the individual investor and their linkages to real value generated by goods and services in the market economy.
Stock trading involves purchasing a portion or a ‘share’ of a company which entitles the shareholder to a similar share of that firm’s profits through dividend income while allowing room for capital gains generated in the free markets in which financial products are traded – in the case of stocks, the stock exchanges.
Many of the stock trading strategies and approaches involved in trading these stocks hail from the legendary investors who have amassed large fortunes for themselves or for the professional trading firms which they have represented or run. An early pioneer of stock trading from which we have much to learn was Benjamin Graham who used a conservative approach and avoided risk in favor of consistent long-term returns. Graham capitalized on the margin of safety, or the difference between a stock’s price on the stock exchange and what he computed to be its actual value. Graham was also a key advocate of diversification as an important element of stock trading, recommending that each stock trader hold a portfolio of between ten to thirty stocks.
One important lesson that Graham’s risk-averse approach teaches us is to avoid – or at least to be careful around – highly risky equities such as technology stocks, a piece of advice that could have saved millions of dollars of stock traders’ money during the turn-of-the-millennium dot com bust. Others, including Graham’s student and one of the most successful investors in history, Warren Buffet, have advocated this model, advising that stock trading can be highly lucrative and very safe if one sticks to large and established firms that have proven track records and a likelihood of continued success.
Despite the soundness of the investment advice offered by Graham and Buffet, there are many other investment styles available within the world of stock trading and others, including the contrarian David Dreman, have successfully capitalized on picking underdog stocks with large margins of safeties. Stock trading is a fast moving and demanding world but it can also offer much satisfaction while helping you to grow your personal wealth.
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