When most people hear the words stock trading, they think of day traders. There are many other types of trades, however, and even buy and hold investors take profits off the table from time to time. Businessmen managing sizable portfolios buy and sell securities each month, providing a monthly or quarterly update on their dividend stock holdings.
While primarily a buy and hold investor who utilizes margin and backs his picks with writing covered calls, I can indeed provide some insight into the world of trading stocks. I do make swing trades from time to time as I grow my portfolio. I don’t always plan to do so, but I continue to learn what moves are going to help me maximize profits based on the capital that I have.
People see a stock move up or down a dollar from week to week, and they think that’s not significant. They are looking for the cheap stock that is going to skyrocket. Let me teach you, however, why that’s not where your attention should be focused.
ENR Energizer Holdings is one of the stocks that fit the mold of the lesson I’m providing here. Buy that stock, and you basically get a 3 percent dividend. Energizer Holdings is a great company, but you want more than a 3 percent yield. In fact, you are looking to make a trade. Keep following me here.
Now let’s say that you go and buy up 100 shares. You are now entitled to write a covered call on those shares, pocketing the premium for an additional return. I’m describing a play that I have recently made myself. Now let’s say that you input margin, and you double that play or make a similar move with another stock. Your return could be close to 20% or even more annually.
That is a stellar return. But now let’s dive into how ENR Energizer Holdings has been moving in recent weeks. It surges for a few days, and then it falls for a few days, staying in the $50 range. If you just have a few shares of a company, you don’t notice this as much.
But if you have quite a few shares, you notice it more often. Now, let’s say that instead of making the moves I described, you decided to trade the stock. You wait for a dip by placing a limit order and buy-in, and then you wait for a surge by placing another limit order and sell. Pocketing the money from those buys and sells each week has the potential to bring in a much bigger return than just 20% annualized.
Yet, of course, you have to factor in that it’s not easy to time the market. Furthermore, some of your limit orders might not execute based on your projections. Energizer Holdings could surge further or drop considerably lower at any given point. Trading stocks comes with increased risks, and you have to invest in the stock market based on your personal risk tolerance.
Day traders and swing traders need a sizable amount of money in order to take on this risk and even see the potential profits says TradeIdeas. The same goes for people investing in stocks with margin and writing covered calls on the shares that they have. I’m more comfortable with the latter strategy and am seeing great returns. But if you want to go for the trades, the potential profits can be rather intense. The same goes for trading options.