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By Tim Parker Updated Oct 20, While buy low and sell high is a strategy that has resulted in big accumulations of wealth, this isn't how the professionals find their success.
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The retail investor who is accustomed to working with stocks can simultaneously put their money to work in three ways: Price action —The stock will hopefully rise in value. Dividend —The fee a company pays you in exchange for using your money. Call revenue—The money an investor pays you when you sell a covered call against your stock.
Price Action Strategies If investing were a game, the way you'd win would be to buy a stock at a low price and sell it at a higher price, at a later date. If you quick earnings up to 100 a home, you understand this concept in a very practical way. In order to make a profit on your investment, it's often best to use one of two strategies to do that.
The first is called value investing.
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Stocks, just like the products you purchase every day, go on sale from time to time and value investors wait for that sale price. This makes it even easier to make a profit, because stocks that are undervalued on sale have more room to grow.
Your favorite stock may not work for this strategy, because it must pay a dividend, it must have a price that is cheap enough that you can purchase shares, and it must trade a lot of shares each day; at least 1 million shares of daily volume is best.
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Remember that a company's value is not based on its price. Finally, you don't want a highly volatile stock. If it has wild price swings, that will be much tougher to manage. This is where you put your stock research and evaluation skills to work. Once you find your stock, assuming that you want to value invest, look for this name to be in the middle, or towards the bottom, of the trading range for the past 52 weeks.
If it isn't there now, either wait for it to give you a price that you want, or find another company. There are plenty of worthy candidates for this strategy. The second way is momentum trading. Some investors believe that the best time to buy a stock is when it continues to go higher, because just as we learned in grade school, an object in motion tends to stay in motion.
The problem with momentum trading is that it tends to work better for shorter-term investors. For our strategy, we want to think long term.
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The more years you hold the stock, the better your potential returns could be. The dividend gives us two advantages that help our money work for us in more than one way.
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First, it gives us a stable income. Sure, a company can choose to pay or not pay a dividend, as they would like, but for a high-quality company, with a low payout ratiothere is a lower chance of the dividend on a quarterly payment getting cut. Secondly, it lowers your cost basis for the stock you purchased. If you don't feel confident with this leg of the strategy, buying a stock and collecting the dividend as it goes higher will still be an impressive gain.
Before we sell the covered call we have to make two important decisions: What is the strike price?
How many months into the future do we want our contract to expire? Strike Price A covered call is an options contract strategy that gives the trading basics of the contract the right to purchase your shares, if it is at or above the strike price. Presumably, you don't want your shares taken from you, although you may change your mind in later years, so your strike price needs to be high enough that the stock doesn't rise above the strike price, but low enough that you can still collect a healthy premium for the risk you're taking.
This decision is tough. If your stock is in a downtrendyou can probably sell price of trading signals option with a strike that isn't much higher than the stock's current price.
If the stock is in an uptrend —for the sake of safety—consider waiting to sell the call until you believe the move up has run its course, and the stock will soon go the other way.
Remember, when the stock rises in value, the value of your option falls. This also adds the benefit of the covered call acting as a hedge.
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Expiration Date The further into the future you take your option, the more of a premium you will be paid upfront, to sell the call, but that's also more time that your stock has to stay below the strike price, to avoid having quick earnings up to 100 " called away " from you.
For your first contract, consider going three months into the future. The covered call will make money for you as soon as you sell it because the premium that the buyer paid is deposited directly into your account. It will continue to make money for you if the price of your stock falls.
As the price falls, so does the premium. You can purchase the contract back from the buyer at any time, so if the premium falls, you can purchase it for less than you sold it.
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That equals profit. On the other hand, if the stock rises above the strike price, you can purchase the contract for more than you sold it and incur a loss, but it saves you from having to give up your shares.
One of the best ways to use the covered call is for the collection of the premium at the beginning, and although you can buy the option back if it goes up or down, save this for severe circumstances.
Also, remember that the money you collect by selling your covered call can also be subtracted from the price you paid for the stock. You can still purchase the stock and collect the dividend, but wait to sell the covered call until you're comfortable with how it works. The Bottom Line For most investors, putting money in high-quality stocks for long periods of time, while harnessing dividend income, is the best way to make money in the market.
Later, once you understand how to use the covered call, you can significantly increase your yield. Although the fixed income side of investing isn't as thrilling to watch, it is the most appropriate for retail investors and as we can see, the numbers can add quick earnings up to 100 fast.
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