Stock market investing can be a very confusing endeavor. But with the proper investing strategy, it doesn’t have to be. The trick is to outline your goals, take an honest look at your personality and skill-set and choose a strategy that works best for you.
Below are four of the most popular investing strategies.
Stock Market Investing As A Value Investor
This one was made famous by Warren Buffet. And it’s set up for the long term. It takes a great deal of stock research, analysis and business knowledge to pull this off effectively. But when it’s done right, it’s wonderful.
Value investors basically look for strong companies that are trading below their fair market value. Things to watch out for are companies who are legitimately undervalued (bargain stocks) and stay away from them.
The reasons these companies are losing value could be due to decreasing profit margins, losing market share or succumbing to competition just to name a few.
The companies you want are strong, growing or at least stable companies that have a good future outlook but are simply undervalued because the vast majority of investors haven’t figured it out yet.
The companies you invest in need to have firm financial footing, a good business model and acceptable debt structure. You’ll have to perform extremely detailed fundamental analysis to uncover as much as possible before purchasing shares. You can never know too much about an investment.
Also, value investing is a buy-and-hold strategy. So be prepared to hold on for a long time – upwards of ten years in most cases. One great thing about value investing is the bulk of the work is done upfront.
If your research is done correctly, then you simply buy shares and wait until everyone else figures out it’s a great company too. At that point, the value of the stock rises and you can choose to sell and realize a profit or hold even longer and see how high it can go.
If you don’t enjoy delving into a company’s most intimate financial details, then value investing may not be the strategy for you. However, if you are analytical in nature and are disciplined enough to wait for a sizeable return on your investment, this form of stock market investing could be a good match.
Stock Market Investing As A Day Trader
Day trading is the polar opposite of value investing. No buying and holding here. Often investors who employ this strategy only hold stocks for an hour or less. And they rarely ever hold them overnight due to the great risk of loss involved.
Day traders sit at their computers and rapidly buy and sell stocks throughout the day. They constantly watch dozens of ticker quotes and price fluctuations attempting to spot market trends. Their hope is that during the few minutes they own the stock it will rise or fall in value allowing them to realize a profit.
Most day traders use technical analysis to determine which stocks to buy and sell. Many also use computer programs designed to analyze data and automatically generate buy and sell recommendations.
This is a risky stock market investing strategy due to the volatility of the short-term market. Any political, economic or market hiccup can cost the day trader tons of money.
Day traders often buy stocks on borrowed funds attempting to make more profit through leverage. This increases the risk even further because whether they gain or lose, they have to pay back what was borrowed.
If this is something you really want to try just use caution and practice before you invest money. Then start small and be aware that the fees associated with the rapid trading can often eat up the little profit you do make.
It is possible to be successful at day trading. However, it’s the most difficult of all of the stock market investing strategies to master. The biggest profit is generated by the “experts” who sell books and other how-to materials.
Stock Market Investing As A Growth Investor
This is the one dreams are made of. Or nightmares for the faint of heart. There is no other stock market investing strategy where you can make or lose so much so fast.
Growth investors look for emerging companies that have great potential for future growth. These investors will buy even if the stock seems over-valued as long as the company looks as though it will one day be an industry leader. (Think getting in on the ground floor of Microsoft or Google. See what I mean?)
Surprising there is not nearly as much fundamental or technical analysis involved in this strategy as with most of the others. But please don’t misinterpret that to mean there’s no work involved. There is and plenty of it. It’s just more about strategy and the latest fads than in-depth number crunching.
Growth investors have to stay on top of trends and know which industries, geographic regions and stocks are hot. They also have to be able to sift through all the hype and opinions of what’s going to be the next big thing and pluck out the real winners.
Some of the major things to look for when determining if a company warrants a closer look are patents owned, a CEO with a history of successful start-ups, and their competition.
Successful growth investors also set realistic buy and sell limits. When properly set and used these limits can prevent you from holding a stock too long losing more money than necessary or buying a bad investment that you’ve fell in love with.
While growth stock investing is not a buy-and hold strategy, it’s not day trading either. You hold these as long as they’re aggressively growing and sell when they’ve hit their peak or shortly thereafter. This could take anywhere from a few weeks to several years or more.
Because the potential for quick gain is greater than with any other method, the risk is also greater. During bull markets growth stocks will significantly outperform the market.
However in a bear market, your losses will likely be great and happen very quickly. In these situations, it’s important not to panic and sell low. In most cases you should hold on until the market swings up again.
An experienced growth investor understands the inherent risk involved and is willing to accept it for the opportunity for reward. If you choose this stock market investing strategy, start doing research prior to investing money. You’ll begin to see trends among emerging companies and how their stocks behave.
You should also research currently successful companies to get a good idea of how they looked at the beginning. History is a good predictor of the future.
In any case as you near retirement it would probably be a wise decision to include less and less growth stocks in your portfolio due to their volatile nature. However, if it will be a while before you retire these stocks could increase your net worth significantly and quickly.
Stock Market Investing As An Income Investor
An income investor’s main focuses are capital preservation, lowering risk and generating a steady stream of income. The two most common forms of income generated by income investing are dividends from stocks and coupon payments from bonds. This method is very popular among retirees and pre-retirees since it is a very conservative strategy.
This method is similar to value investing in that it’s a buy-and-hold strategy and there is a lot of fundamental analysis involved. However, with this method you have to learn about and analyze not only stocks but bonds as well. This makes this stock market investing strategy more difficult to master if you have no previous experience.
You’ll also need a thorough understanding of how the market works and how changes in interest rates affect both stocks and bonds. Stocks and bonds often offset each other when there are changes in the interest rates.
Rising interest rates decrease a bond’s price and while this hurts stocks as well, rates usually rise when stocks are doing great. Conversely bonds do well when rates are dropping and this usually occurs when stocks are performing poorly.
Income investors choose stocks that are well-established and have a long track record of steady price appreciation, stable revenue and generous dividend payouts. And like all investment strategies you should make every attempt to buy when the market is low.
The bonds you’ll choose are more stable than bonds bought for other types of strategies. They should have the highest yield possible for your risk tolerance level. Obviously the further you are from retirement the more risk you can afford to take.
You’ll want to buy bonds when the interest rates rise. This causes the price of bonds to drop and raises their yield. This means you make the same amount of money by investing less. If you sell a bond, you need to wait until interest rates drop. This will increase the price of the bond and therefore increase your profit when you sell.
This method is very different from growth investing in that it will never keep up with or beat the market. This is the trade-off for the lower risk involved. What it’s designed to do is preserve your capital and generate income.
However, you will need to be careful to take on enough risk to stay ahead of the current inflation rate or you’ll start eating into your capital which is something you never want to do.
Overall, this is a tax efficient method since the gains are usually smaller and steadier than with other strategies. The fees are usually lower as well since there’s not nearly as much trading involved.
As with any stock market investing strategy learn as much as you can before getting started and “practice” first. This way you can get the feel by watching certain stocks and bonds before you invest your hard-earned money.
As you can see these are four very different strategies for stock market investing. Each has its own benefits and drawbacks. However, by choosing one that matches your goals and focusing your attention to mastering that method, you have a greater chance of success.
These are obviously very hands-on methods and I can’t emphasize enough the important of investment research before you begin. If you’re analytical and enjoy working with numbers you could really excel.
However, if it all seems like too much, don’t despair. You can always hire a traditional broker. They will sit down with you, go over your plans and design a portfolio to help you reach your goals. Stock market investing doesn’t get any simpler than that.From Stock Market Investing to Investing Money