Investing Tips - Why You Should Keep Some Spare Capital In Your Trading Account

For many people stock market investing is not just a way of making some extra money, it's also an exciting hobby as well. Therefore many investors will look to be fully invested in stocks at all times. However this is obviously not the most profitable strategy you can employ.

The fact is that you should always have some spare capital in your trading account ready to invest should any decent trading opportunities arise. This is because the stock markets are not always efficient and for that reason there will always be some bargains to be had.

For example during a massive sell-off when the whole market falls, even the best stocks will fall as well, making them very cheap on valuation grounds. Similarly if there is some bad industry-specific news, you may find that some stocks within a sector will fall more than others, making them potentially very attractive investments.

So therefore you obviously want to have some spare money lying around ready to take advantage of these opportunities. There's nothing worse than seeing lots of companies trading way below their true valuation, but not having any spare capital to take advantage.

The old mantra of 'buy low and sell high' is something that you should always bear in mind. In an ideal world you should try and avoid piling into stocks when the markets are trading at very high levels, but have a larger amount of capital ready to invest when the markets are falling and appear to be bottoming out.

One of the best strategies is to put money into certain companies in two, or maybe three increments when they start to look oversold. For example if there is a growth company that has always traded on a price/earnings multiple of between 12 and 15 but now trades on a multiple of 11 after a wider market fall, a good strategy may be to invest half of your planned investment now and the other half if the price falls further putting it on a P/E ratio of 10, for instance.

Anyway the point I want to make is that unless you ensure that you are never fully invested in the stock market, you will never have the opportunity to take advantage of these opportunities. It's all too tempting to buy stocks when the markets are buoyant but the real money is to be made when everyone is selling because that's when you get good quality companies trading at well below their true market value.

By: James Woolley

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