An example of this successful investment strategy will help you better understand. You buy 100 shares of a company at $40. It costs $10 in stock broker commission, so you spent $4010. Over the course of a few months, the stock rises to $44. Your investment is now worth $4400. The indicators make you believe that this company will have a short term pullback in its stock price, so you want to sit back while the market moves. However, you still want your money to work for you at this great company. You sell your initial investment only ($4,010) plus the selling commission of $10. $4020 divided by $44 means 92 shares (or a net of $4,048). Your principle is safe (plus the $28) and you have 8 shares in this great company. These 8 shares were bought with Other People’s Money.
Eventually, the indicators show that you should buy in again. Perhaps this new level is $43. You reinvest your $4,048 minus $10 commission and buy 93 shares with $39 left over. You now own 101 shares for your original $4,000 investment for an average price of $39.60. You have bought these shares at a discount of $4.40 per share. In addition, you have $39 in your money-market account at the broker making money at market rate interest.
Using this technique as part of a successful investment strategy on a great company, slowly over time, your investment will grow. Your downside risk will be minimized (although with all investing, your risk is never minimized to zero).
Typically, I do not use technical trading tools to sell the shares that I buy on Other People’s Money. I only sell those shares when the fundamentals of the company start to turn from Fair to Poor or when the stock has appreciated to the point that I see little upside. Otherwise, these are lifetime investments because I have not spent any money to acquire them.
I cannot leave this subject a successful investment strategy without a reminder for you to be cautious with your earnings. Try to avoid greed and hope for a small return on your money. When you are concerned that the market has moved against you and the indicators all look like they are going to give you a sell signal soon, go ahead and lock in your profit. There is no shame in being cautious and profitable as you work your successful investment strategy.
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