It is very obvious that we have more novice investors in the capital market than informed investors. Thus the ability to sense the signals of the bearish market or the bullish market is lacking. The term bearish market refers to market where the prices of stock are dropping. We say a bear has persisted in the market when the drop in prices remains consistent over a period of time.
Investors that buy the stock before the bearish market sets in will loose a lot of wealth in their stock investment portfolio. How to avoid this or manage this kind of undesirable situation in the capital market is the focus of this article, however it is important to explain the term bullish market before we proceed. The bullish market refers to a market in which prices of stock are generally moving up. When investors buy into the market shortly before a strong general stock market bullish run, great wealth will be created. Infact some people may be temped to say the stock exchange is an avenue for quick riches. Unknown to many new investors, they probably feel this is frequent occurrence in the sock market, seeing they  have just doubled or triple there wealth by investing in stocks, they will go for aggressive drive to raise fund massive capital market investment; but unfortunately, they may be coming into the market at a very unfavorable peak. In no time, “news sensitive information” will filer into the market that the prices of stock will nose dive.

So how do you protect your portfolio from loses?
The method used for screening your portfolio from crashing in monetary value is called stop-lose method or system. Before we consider the application of the method, it is important to note that the foundation for holding a successful wealth creation portfolio is embedded in the selection of stocks that comprises the portfolio. If you made mono sector (only one sector) selection you will be faced with risk of unfavourable government policy against such sector. Single class selection can be very risky also; a situation were an investor decides to build a portfolio that is composed of only penny stock  - only growth stock or only blue chip stock. Thus a mix of various sector and different classes of stock can serve as a shock absorber for the portfolio. We shall discuss how to build a successful wealth creation portfolio in our future articles.
Stop-loss method: This method is focused on the price movement of the stocks in a particular portfolio against the purchase prices. The current market price of the stocks is consistently compared to the purchase price to determine the market direction of these stocks. To forestall heavy losses the stop loss method is method that works like magic for some investors. This is how it works, assuming an investor purchases a stock at N100 WITH A STOP LOSS OF 10-20 per cent. It therefore means that if the stock drops below the range of 80-90 automatic sale of the stock is expected to be executed. Purchase price = N100.00.
Stop loss price: (between 10-20 per cent) =90-80 for actively traded stock like the nine most capitalize stocks the stop loss level can be reduced to between 5 and 10 per cent. Here we are referring to blue chips stocks like African petroleum –AP, NBC, Zenith Bank, Nestle, Julius Berger, 7Up etc. stocks with prices above N40.
A share in a smaller company in which dealing or trading with the price movement are greater, would warrant a higher margin say up to 30 per cent. We are referring to penny stock her and example includes AIICO, Japaul, Finbank, Omatek, Tantalizers etc-stocks with prices less than N10.
As the share price rises, so you increase your stop loss figure, for example, you buy Nestle at N300 and fix your stop loss price at N270 (i.e 350-315) and on the contrary if it drops N270-10 per cent less than the purchase price then you sell immediately. Sounds simple: if your stop loss is 10 per cent you can’t loose more than 10 per cent of your stake plus your stock broker charges.
But you have to maintain firm controls by  reason of other important inter playing factors. It’s easy to be swayed by other opinions and considerations. The stop loss system may not be a perfect system, however no system is. Otherwise there would be many more rich people made simply by applying only one formula. Thus success in stock market is an interplay of many factors. Not all shares which drops 10 or 20 per cent go on down. By using this system you may sometimes sell a good stock too soon and frustratingly watching it go on up and up. That is the price you pay for operating a safety net.
Stock brokers in this country don’t normally operate automatic stop loss on behalf of their client. The ordinary speculator must keep an aye on his shares. In addition to the above suggested strategies, portfolio selection and stop loss method we shall consider the third important factor that would ensure you avoid unnecessary losses.
Tips for selecting stocks with high returns
Quarterly earnings as investment index:
Earning per share = Profit after tax
Outstanding Shares
A quarter of a year = 3 months (i.e. we have 4 quarters in a year) so quarterly earnings shows a company earnings in 3months.
It is not advisable to buy a stock whose current quarterly earning is flat. In other words it shows no change compared to the quarterly earnings for the corresponding period the previous year.
In the same vein be ware of stocks with declining quarterly earnings.
Instead, select stock with long history of increasing quarterly report. Don’t even rush to buy the shares of a company that has been recording a long period of decline in quarterly earnings and suddenly begin to show some rebound. It is advisable to watch the performance for several quarters in future.
25 – 30 per cent current quarterly earning growth compared with same quarterly growth the year before.
To be on the safe side choose stocks that have successive quarterly earning growth for many years, this helps you minimize investment risks while you bullet proof your portfolio from losses.
The growth in quarterly earning should also be supported by strong sales growth to justify investors confidence.
Danger signal: If a company that was doing well suddenly begins to report declining quarterly earnings for 2 quarters or more, this may be sign of danger. For example if a company was recording quarterly earning growth of say 60% or more and suddenly this drops to 10 per cent or 15 per cent for successive quarters, beware.
A number of factors could account for this:
(a) Change of management team.
(b) Management board crisis.
(c)  Change in government policy e.g. Bank minimum capital base.
(d) Wrong production decision.
(e)  Long term investment; it is expected to take  long to positively impact on its bottom line, earnings may be negatively affected.
(f) Payment of ambitious bonus dividends: some companies even borrow to pay dividend; so be aware of their sources of income. The implication of the payment of more bonuses is that the unit of shares will increase, thereby tasking its earnings, this means that the company has many more “mouths” to feed.