Your Crash Course to the Buy and Hold Trading Strategy

To the average seasoned trader, the term “buy and hold” might make them cringe, but trading stocks doesn’t just have to be a speed game. Whether you are looking to make a little bit more interest than what your bank offers or you are taking over your retirement accounts, there are plenty of reasons why one would want to buy and hold.

Just like how somebody might invest their money into a house for a couple years, the exact same can easily be done with stocks. The buy and hold strategy simply means that you plan to buy a stock and hold it for an extended period of time, usually years. Users of this strategy, don’t need to fuss over the daily activity of their specific stock, rather they are more interested in the overall long-term situation.

With any trading strategy there are cons. For one, what if your stock loses more value rather than gains? While the average long-term trade for most stocks is usually up, there are stocks that lose value over the years. Especially if you happen to buy at the peak of a boom. Take a look at Yahoo (YHOO); however, these moves are normally the effect of another company dominating the market.

When it comes to choosing what stocks to invest in, it really isn’t that hard. There are a few things to keep in mind:

1. Don’t buy at the peak. Easier to say than do, but odds are if the stock has already gained popularity and a good following, then that stock won’t be able to consistently go higher for your entire time frame.

2. Make sure your stock has money. The last thing you want to do is invest in some shaky company and then find out 2 years later the company went bankrupt. You instantly just lost all your money. Check the balance sheets and fundamental information of a company and take note on how they are generating capital. Are they relying too much on debt? That generally not a good sign.

3. What is the “it” factor? When investing in a company with a buy and hold strategy you want to make sure there is something that makes that company important in the future. For example, 20 years ago when some traders loaded up on Microsoft (MSFT) they saw personal computers were the future, and MSFT had an advantage in that area.

How do I find stocks to invest in?

Start with companies you already know. Whether they are items you use everyday or just things you are fond of, it is a great place to start. Using a service like Google Finance and Fool.com you can see similar stocks and company numbers and news.

Obviously not every company you like won’t be a good buy, but at least you know what they do and what makes their product so good. The key is to know what makes them important and relevant in the future. If price of oil is guaranteed to rise over the next couple of years, then what companies will that benefit?

There is a cause and effect. Find the relevant factor (cause) and the stock that will benefit the most (effect).

Some people call buy and hold boring, slow, and inefficient; however, if you are not looking to actively participate in the market while still safely extending your long-term wealth, then it is a great strategy to use.

Find out how to use technical analysis to determine short-term and long-term stock price movement.