The majority of investors are looking to own stocks via the diversified index and low-cost funds, reinvesting dividends, and also dollar-cost averaging methods. Few investors opt to choose individual stocks, creating a portfolio after analyzing a particular firm. There are numerous ways to look at stock investing, however, as you will discover below.
Most of them fall under any of these three styles, which include growth investing, index investing, or value investing. These strategies do follow the ideology of an investor as they strategize on their investment plans, which could be affected by several factors such as investing goals, risk tolerance, and the current financial situation. The following are some of the strategies that suit the most stock market, investors:
1. Value Investing
Investors who major in this strategy are bargain shoppers. They will look for stocks that seem undervalued. Stocks whose prices do not reflect the actual value of that particular asset. Value investing operates on the idea that there exists some irrationality in the market.
These investors look to maximize profits on this opportunity, whereby they will get assets at lower prices and make good returns from the same. Value investors do not have to peruse through loads of financial data to find the ideal undervalued stocks. Several mutual funds provide the investors with an opportunity to possess some commodities that are presumed undervalued.
Ultimate Value Investor
The real value investor knows all by themselves that for this strategy to work, they must apply it in the long run. This strategy works perfectly for anyone who purchases businesses rather than stocks. As a value investor, you ought to look at the big picture and not just a temporary performance.
Value Investing Tools
The price-earnings ratio comes in very handy for investors who do not want to conduct exhaustive research. It is the primary tool used by many to locate and identify the cheap or undervalued stocks. Lower price-earnings ratio means that one is paying less for every $1 of the present earnings.
Value investors, therefore, seek firms that have a low price-earnings ratio. However, researchers say that it is crucial to combine formulaic values with momentum, profitability measures, and quality. These will assist a lot in avoiding some of the value traps that are not easily seen.
Take Away
Value investing can work if you decide to pursue it in the long run. You should also be well prepared to put in efforts on research on the selection of the stocks. If you put in serious efforts and patience, then you will benefit a lot from this remarkable strategy.
2. Growth Investing
Investors that concentrate on growth investing strategy look at the strong upward growth of stocks in the future. They invest primarily in promising assets that seem to benefit them in some months or years to come. It is in perfect order to utter that a growth investor is usually aiming at the “next big thing.”
This technique does not involve just mere speculations. It encompasses an assets’ current health and its potential to boom in the coming future. The investor looks at the prospects involved in the industry that the stock thrives. For stock or an asset to succeed in the future, there must be a widespread appetite from consumers in that product.
That can only be identified by investors by looking at the recent history of the company. A growing stock will simply show growth in the recent past. The said company for the stock must be having consistency in the general trend of revenue received and quite strong earnings. Such instance will automatically show the capacity of the company to bring out the growth expectations.
The primary issue with growth investing is that it does not have dividends. Companies that are in the growth stage need the capital to sustain and maintain that expansion. Therefore, dividend payments cannot be possible at that stage.
Growth Investing Variables
A growth investor may consider a few factors while using this technique even though there are no specific metrics to follow. Research has it that growth techniques will work correctly during falling interest rates. A growth investor should carefully analyze the management prowess of a firm before investing. Growth usually is challenging to achieve in any business, and therefore, if management is an issue in a firm, then growth could not be achievable. The stellar leadership team is very crucial to achieve growth in a company.
Competition is another issue growth investors should assess. A firm may be achieving stellar growth, but the primary product or service is effortlessly duplicated, such cannot be profitable in the long run for an investor. Growth will also not be of any essence if it is achieved via immense borrowing.
3. Momentum Investing
This technique involves riding the wave. Such investors believe that losers will keep on losing while winners will always be winning. The method encompasses the purchasing of stocks that are having an uptrend. These investors will short-sell assets when they seem to be going down.
Momentum investors can be termed as technical analysts. That means that they usually apply a stringent data-driven approach to trade. In this technique, you will have to look for specific winning patterns that will guide you in the stocks to invest in. Momentum investors do not act by the efficient market hypothesis.
The hypothesis says that stock prices are a reflection of all the information that the public is aware of. A momentum investor acts in resistance to this theory since they will capitalize on overvalued and undervalued equities.
Momentum Investing Appeal
Research shows that momentum investing has got annual gains of around 7.3% in the past 20 years. Studies show in recent times that momentum investing strategy could work correctly without lots of research or full-time trading. A study done back in 2015 proves that this strategy outperformed its benchmark, and that was after all the transaction costs were accounted for. It also showed that even a minimum of $5,000 was sufficient to bring in quantifiable returns to an investor.
This technique may involve short selling for aggressive traders. These investors typically benefit from a drop in the price of a stock. A good example is whereby a trader believes the costs are going to fall, and so, therefore, they decide to sell their stock for around $100. They will sell the assets for 100$ and then now wait patiently till the prices go down to buy the dip.
They then purchase back the assets they initially had at a lower price say, $30. Now, here the investor sold the asset at 100$ and repurchased it at $30. That means they have gained $70 from the quick sale. This technique is a bit risky but can be very profitable for the risk-takers.
4. Index Fund Investing
The majority of security buyers have turned to portfolio management via the mutual funds because of the inconsistency received on the returns and also time wasted in implementing a speculator strategy. According to a study conducted on Profile of Mutual Fund Shareholders, about 91 million people had one or several mutual funds in 2015, which represents a fifth of financial assets for the households.
This institute, however, noted that only a countable number of managers could make it in the market over a long period. Index mutual funds are ideal for investors who do not want to lose their investment on a single stock. The developer of this strategy claims that picking a fund that should outperform the market is quite tough and that the few who were able to be merely lucky. This technique is, however, more passive as compared to the growth or value investing. It does not involve a lot of work and strategizing from the investor. The technique diversifies the trader’s money among different types of equities in a bid to achieve the same returns in the stock market.
The main advantage of this strategy is that it is very promising in the long run, and very few strategies outperform it. Index funds investors will always look to reduce risks in their portfolio. That is via asset allocation, where investors will buy ETFs and index funds rather than purchasing individual securities.
Having several asset classes re-balances your portfolio and also brings down overall volatility. This technique will ensure that you receive regular portfolio gains.
Take Away
Stock market profits are slippery and more so in the short run. Many investors are still looking for the ideal strategy that will bring in high returns without too much risk. The truth is, no one has been able to create a 100% working strategy. Investment gurus receive so much praise when they ‘discover’ a new plan, but when the inevitable happens, they join the rest who were humbled before, after their plan failed.
The search for the perfect strategy in the stock market, however, still goes on. Owning securities has never been comfortable in the market. With stock, you are not sure of what will happen tomorrow or how investors are going to receive rumors and news, meaning that you are not sure of profits in this market.
So as an investor, try out different strategies and see what works for you then apply it in the long run. An ideal technique will be more profitable in the long term. Make sure you reap well in the stock market when things are going well as when the time for disappointments comes you will surely not like it.
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