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When it comes to trading on the stock market, there are two choices to make, either randomly choosing and hoping for luck or using strategies to determine what stocks to buy, when to sell and how to protect your investment dollars. It is much smarter to use strategies, but the investor will have to choose from hundreds of different strategies. There are a couple of methods that have worked well for many years. Beginners should first investigate these basic strategies to see how they perform, and then the investor may explore new methods.

A popular way to reduce the risks involved in holding a specific stock is called hedging. By purchasing a put option, an investor is permitted to sell the stock at a specific price within a specified time frame. Therefore one can effectively counterbalance their risk if the price of the stock does indeed drop. If the initial price of the stock goes down, the value of the put option should automatically increase.

The most expensive hedging strategy is buying put options against individual stocks. This is often not the best option; if you already have a diverse portfolio, you may fare better if you buy a put option on the stock market, or to sell financial futures. In both cases, you are protected if the overall market prices drop.

This approach to buying stocks grew in popularity during the 1990s. The basic idea behind this strategy is to buy those Dow stocks that comprise the best value stocks at the moment, by choosing the 10 stocks that have the best, i.e. lowest, P/E ratio and the highest dividend yields. Because the Dow favors well-established companies that perform well year to year, these 10 are considered the most likely to grow in the next year. A variation on this strategy is called the “Pigs of the Dow,” in which you purchase the 5 stocks that had the greatest drop in price over the past year. Again, these are thought to be the stocks most ripe for growth.

When you buy stocks on margin, you are borrowing money to pay for your investment. If the margin is 100%, you can buy twice as many shares as you would have if you did not buy on margin. Usually, this loan comes from your broker. The upside to buying on margin is that your money goes further. The downside is that if the stock goes down, you will still have to pay back the loan. Therefore, you should limit your margin buying and place stop-loss orders to put a floor on your losses if the market should go against you.

An investor must choose a fixed dollar amount to invest regularly to successfully complete dollar cost averaging. For example, the buyer may invest in mutual fund shares every month. If that fund plummets in price through the market, that investor will be given more shares for his monetary expenditure. So, as the prices rises, the fixed amount price will allow the purchase of fewer shares.