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strategies for selecting winning stocks in the face of economic crisis

Updated on May 8, 2011

Reason for investing in stocks

Stock market investment is generally believed to be a form of investment that is not affected by inflation. The reason behind this assumption is that companies will usually factor in the increase in price level into the cost of their goods and services. Stocks for the purpose of this hub are taken to represent common shares of companies (penny stock or blue chip). We have about five classes of stocks;

Classes of common stocks/ shares

Defensive stocks: - defensive stocks are common shares on companies that retain their value in declining economy. Value in this context means intrinsic value ‘true value’. Intrinsic value is a factor of; earnings, company’s capital structure, interest rate, national and global political climates, investment decisions, projections, quality of asset and the perceived quality of management team. Intrinsic value must not necessarily equal market price of shares.

Investing in this kind of stock is what we shall all target in times of economic crisis or financial crisis. But you still need to carryout your technical analysis.

Growth stocks: - growth stocks are shares of companies that consistently out perform the expectations of analysts and investors in terms of revenues and earnings. Growth stocks give investors the opportunity to earn a relatively handsome return from increases in stock’s market price. The chances that stock’s market price will always be higher than the intrinsic value in a downturn economy is very rare. So try as much as possible not to put much hope in these classes of stocks in the face of economic crisis.

Income stocks: - income stocks are common stocks that pay dividend that is relatively high compared to their market price. You can have a good number of this kind of share in your stock portfolio.

Speculative stocks: - these are stocks that have high risk-returns tradeoff. The stocks companies that: rely heavily on debt, are solely relying on one source of income, are faced with the chance of losing a major lawsuit, etc are examples of speculative stocks. You have no business in these kinds of stocks if you have no large net worth as a cushion to the often large losses that accompanying this kind of investment in stock market.

Hedging or strategic stocks: - these are basically blue chip stocks. Blue chip stocks are the stocks of companies with a good history of dividend payment and quality earnings. The prices of blue chip companies are often high compared to the price of penny stocks. Blue chip companies stand more chance of surviving harsh economy and I will therefore advice people to invest more in blue chip companies in times of economic or financial crisis.

Selecting winning stocks in the face of economic crisis or global economic meltdown can be challenging and tasking if certain factors are not taken into consideration.

 

Strategies for selecting winning stocks

Strategies for selecting stocks that can perform (both in terms of dividend payment and capital appreciation) must be in place and that is the aim of this hub. I will list and explain five variables whose effect on our stock investment must be considered before venturing into stock market investment. So sit back and enjoy!

The first step to be taken is to establish a goal for your-self. After all, the reason behind every form of investment that we make is to meet our goal or set of goals. These goals can either long-term or short term in nature. Slight difference exists in our decision to buy, sell or hold on to our investment in stock.

  • Inflation rate:

Inflation is the first variable that I will be considering. Inflation is the persistent increase in price level as we are taught in elementary economics. Under inflationary rate, certain group of people suffers while others enjoy. In the world of business, companies whose goods or services are important will enjoy while companies with lesser important goods or services will suffer. The reason for this is that companies with necessary goods or services will easily factor in the effects of inflation into the prices of the goods and services while others cannot. A good stock market investment strategy is to invest in the shares of companies that can pass on the effects of inflation to their customers.

  • Interest rate:

Fluctuations in interest rates affect the ability of companies to be profitable. Companies that finance their projects with fixed debt that has fixed interest rate will suffer more financial loss in periods of reduction in interest rates and vice versa. Floating rate moves along with the prevailing market conditions. One the effects of financial crisis are to tighten credit thereby increasing interest rates. And if this is to hold, companies that were able to get loans with a fixed interest rate at the time the rate was still low will reap handsome financial rewards. So, a good strategy is to invest in the common stock of companies that were able to be locked in a fixed interest rate that is favourable. Note however that being locked in a particular interest rate has its own disadvantage.

  • Debt-Equity ratio of the company:

There are businesses and financial risks that are associated with debt finance in business. Business risks are minimized under an upturn economy but maybe highly magnified under a downturn economy. Business risk is the risk that a business will not make enough profit to meet her financial objectives. While financial risk is the risk that movement in interest rate and other financial variables will work against a business. A good strategy is to invest in companies with an optimum capital structure. This though is practically impossible but, theoretically possible so just ride on the horse of the later.

  • Industry of the target company/ Economic reality of the company:

We practically invest in shares of companies with the belief that the company will be profitable. Profitability of companies depends heavily on the business environment of the business and the prevailing economic reality at hand. The global economic crisis has no doubt eaten deep into the operations and revenue generation capacity of many surviving companies. Only companies who had long projected this are still smiling. So, investing in companies with sound contingent plan is a good stock market investment strategy.

All that you have read so far are mostly in the domain of professional financial analysts and investment advisors who have spent hours doing both fundamental analysis and technical analysis. I recommend you engage the services of professional investment analysts (stock brokers in most cases). Or if you trust your judgment and that of financial newspaper columnist, follow them.

Timing your investment (i.e. having an investment program that must be followed) is one vital factor that you or your financial / investment analyst must have. Remember that investment is like exercise program. You take it bit-by-bit, else, you will get you-self worn-out.

To the success of your strategic stocks selections!

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    • chinweike profile imageAUTHOR

      Chinweike 

      8 years ago from Glasgow, UK

      Another good stock investment strategy is to apply a technique called DOLLAR COST AVERAGE.

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