Candlestick Trading Blog
In value investing a margin of safety is the price difference between a stock’s intrinsic value and the current asking price, the spot price. The margin of safety is at the heart of value stock investing. It seems appropriate to mention this concept as many investors are trying to climb out of the hole caused by the worst recession in nearly eighty years. Now as in the early 1930’s, both stock market crashes caused after substantial losses. After the crash that started the Great Depression economist Benjamin Graham introduced the concept of value investing. The idea behind value investing is to buy equities which are underpriced by fundamental analysis. For example a stock may have a low price to earnings ratio, be dividend stocks paying a high dividend yield, or be stocks trading at a discount to book value. A more current concept is that the stock is trading at a discount to projected future earnings. The use of both fundamental and technical analysis is important in choosing stocks with a margin of safety as other investors will be watching the same fundamentals and their interest could drive the stock price up just when it seemed to offer a good margin of safety.
A margin of safety is typically a concept that goes with long term investing. It has to do not so much with picking low priced stocks as stocks that are underpriced by some set of basic criteria. Looking for a margin of safety in investing is a means of managing investment risk. The long term investor is concerned with an economic downturn wiping out years of appreciation of his stock portfolio gained by diversifying a stock portfolio with a range of wise stock choices. The margin of safety provides a cushion during a recession. When the margin, the difference between intrinsic value and price, disappears, however, it is time to find a different stock. The concept of a margin of safety can also come in handy for traders. Although the trader will not buy and stock and hold on to it for years there is always the question of how long to let a stock ride in trend stock trading. Whether the trader is using Candlestick chart analysis or some other online trading software for technical analysis there always comes a point where the odds of a market reversal increase. It is at this point that the trader needs to decide when to exit the stock trade. There is always the possibility of gaining more profit by riding the wave to the end. There is also the risk of losing part of all of the profit if the market corrects too abruptly. Building a margin of safety into such decisions may well be wise. A successful stock trading system will have a means of judging the intrinsic value of a stock and it will have a technical approach that picks the right moment to buy or sell. Value investing helps pick stocks that will over the years. Candlestick basics will make sure that the stock is purchased at the right time to maximize results. Likewise, when an investor decides that a stock’s safety margin is beginning to shrink tools such as Candlestick chart patterns will help pick the right time in a price cycle to exit the investment.Online Stock Market Reviews presented live via the internet by Stephen Bigalow |
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