Speculative deals stand for discipline and risk taking

Since early April until Tuesday, the stock market indices hiked by roughly 28%, the highest growth being recorded by the index that gauges the performance of financial investment companies, BET-FI – 38%.

In order to benefit of the bear market rally in the midst of financial crisis, insiders polled by Wall-Street say investors should have a strict disciplinary approach in deciding when to buy or sell stocks.

“Over the past year and a half, we’ve seen that in spite of the fact that the market followed a sharp downward trend, it was not linear, but floated up and down, swinging from all time highs to bottom lows, when the stocks returned major profits”, Gabriel Aldea, broker at Intercapital Invest told Wall-Street.

He stressed that for earning high returns from speculative transactions when the market goes up, the investor must adopt a strict disciplinary approach by establishing price barriers for buying and selling.

Establishing the stop loss levels is essential, as loss limitation is a core element in drawing a speculative strategy.

What strategies do specialists recommend?

Adrian Duna, financial analyst at KD Capital says investment strategies when the market rallies differ according to investors’ stock trading venues or cash plays.

Buying stocks at the beginning of the rally in order to reduce the stock average, and if the price exceeds this average, may result in high returns or an honorable exit.

If an investor has enough cash, he can choose to buy or hold in this period, at one or more solid issuers, and when the profit target has been acquired or there are signs the rally is over, he would have to sell, says Duna.

“The investor has to put a lot of time into speculative trading, the extreme price volatility not allowing the investors to take the luxury to “forget about stocks” for a few hours or days”, said the representative of Intercapital.

The tight connection of Romanian stock market with other mature markets and constant information on the issuers’ annual reports or the news piling up from the global markets are paramount factors in drawing an effective speculative strategy.

An investor should keep a hawkish eye on issuers with a solid fundamental groundwork that outperforms the market, even though when the market rallies, most of the companies grow stronger accordingly. Most of the times, the existence of a dividend would add more stability to the company.

The discipline in deciding when to get in and when to get out is very important. “For as long as the rally lasts, any buyout seems to be the right thing to do, but if you don’t follow the selloff spree or profit booking, and the speculated amounts increase, it is very possible for the last attempt of speculating to result in a broad pool of stocks acquired at maximum prices, and the loss to account for a substantial part of the previous profit,” the financial analyst stressed.