Many stock market traders and investors like to be fully invested in the stock market at all times. In other words if they have some spare cash in their account, they want this money to be working for them, whether it’s seeking out capital growth or dividends (or both). However this isn’t always the most effective strategy.
The problem you have is that if you are always fully invested in shares, you will never have any spare cash to invest in any bargains when they present themselves. You will either have to accept that you have no money to invest, or sell some of your existing holdings, which you probably won’t want to do.
These opportunities to pick up bargains don’t come up every day, but they are still quite common. Indeed in the last few years we have seen the markets fall quite substantially on many occasions due to various world events. As a result of this even the most profitable and well-run companies see their share price dragged down, and there is a perfect opportunity to pick up some bargains.
There are also other occasions when certain sectors fall out of favour for whatever reason, and as a result certain companies see their share price fall to well below their true market valuation. In other words they trade on very low earnings multiples in comparison to recent years.
So the point is that you need to have some spare cash in your trading account to take advantage. You don’t want to throw your money into the markets when the markets are buoyant because there is always the chance that you are investing at the top of the market.
You’re much better off having more cash to invest when the markets are falling. It’s often said that the best time to invest is when everyone else is selling, and this is generally true. It’s not always easy to catch the bottom of course, but one good strategy is to invest in stages so that you can always invest some more if the share price continues to fall. As long as you investing in solid long-term growth companies that are trading on low multiples, this should be a very profitable long-term strategy.
However the point is that you need money to invest in the first place, which is why you should always have some spare cash in your account ready and waiting. The only time you should be fully invested is when the wider market really seems to have bottomed out, like when the Dow Jones fell below 7000 last year because then you can invest in pretty much any half-decent company and expect to make some very healthy long-term returns.
Article Source: Articles Engine
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