Aggressive Vs Defensive Stock Investing

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Aggressive stock investing means taking greater risks. The risks can take numerous forms. You invest in highly volatile market when the fluctuations in prices defy all the techniques of analytical and fundamental research. There are rises and falls in prices of stocks which occur contrary to the investors’ expectations. There are daring and imaginative investors who manage to make money even in these uncertain circumstances.

Another form of aggressive marketing is that you invest in stocks which appear to be ‘gone cases’ according to popular calculations. But quite contrary to all the wise counsel, they show high growth and deliver rich dividends. Of course, they may also fall further down since they are already gone cases.

On the other hand, you invest in some stocks like Wal-Mart, fully aware that they are costly and their price may not rise in near future. Few people know that buyers of such high value stocks do not invest in them to make money through the rise in their prices, but rather these companies pay rich dividends to their investors year after year so that they become a source of their regular income and livelihood. The dividends paid by such blue chip companies almost nullify the high prices of their stocks which people pay to buy them.

There is no doubt that those who dive deeper into the ocean either come out with invaluable gems or just lose their lives.

But Aggressive investing is not everybody’s cup of tea.

Defensive approach

As a part of the defensive approach, some people recommend that the best investment option is government treasury bonds. They argue that since you buy a debt obligation of the United States, you can be sure that you are going to get paid. All that government needs to do is to raise taxes or sell off assets to pay its debts.

This, however, is not an approach of an entrepreneur who believes that you cannot make money without incurring certain amount of risk. A defensive approach, therefore, does not mean not taking any risk at all, but simply means taking affordable risks and deriving optimal returns at the same time. It must be understood that risks in stock trading are neither higher nor lower than in any other business.

An ordinary stock investor, especially the one who is a beginner should have a defensive approach and be careful while trading in stocks.

A slow, cautious and conservative approach may not yield high profits in the beginning. In fact the profits may appear to be negligible, almost discouraging at the initial stages, but they can turn out to be phenomenal over the time. You will appreciate their value when you retire. This approach exemplifies the truth that slow and steady wins the race.

So as a defensive stock investor, you should calculate how much money you can easily spare every month without cutting down your essential expenses. Consult your stock broker and also do your own research to find out which stocks you should invest. It is always advisable to invest in stocks that yield high dividends. If you can easily pull on with your existing resources of income, the best option is to go for dividend reinvestment plans.

Through time, stocks with dividends yield higher returns than long-term treasury yields. Not only are the dividends higher in stock investment, but they also get favorable tax treatment. Dividends from stock investments attract a maximum of 15% Federal tax rate while the income from treasury bonds, although exempt from state and local taxes, can come in as high as the 35% tax bracket. Moreover, you get the capital gains generated from an increasing stock price. [It is like having a cake and eating it too.] Don’t know if this analogy is necessary.

The high dividend yielding stocks protect you when the market goes down. As the stock prices fall, the dividend yield rises because the cash dividend can exceed the buying price of a share by a large percentage. It can be illustrated by an example: You buy a $100 stock of a company with a $2 dividend which is 2%. Suppose the price of the stock falls by 50%, the dividend yield would go up to 4 %.( this is arrived by dividing $2 by $50 and multiplying by 100.). What often happens is that the dividend paid by certain companies goes so high and attracts buyers in such large numbers that its stock price is driven high even during a fall in the market.

Amit Malhotra