Investing strategies must be learned before you dip your toes in the waters of the investing world. Here are some of the most important strategies that you must learn.
Value investing can be considered as bargain shopping to some extent. Value investors search for stocks that they think are undervalued. Thus, there is an assumption in value investing that some degrees of irrationality exists in the market.
Such irrationality theoretically gives rise to get a stock at a discounted price and make some profit out of it.
The strategy is also designed around the idea that you’re investing in real businesses and not just ticker symbols. You must consider the bigger picture and not the short-term knockout performance.
Growth investors do not search for low cost deals. For them, investments that offer more upside potential when it comes to the stock’s future earnings are more important.
Generally, a growth investor is looking for the “next big thing.” Growth investing, on the flip side, is not a reckless embrace of speculative investing. On the contrary, it involves the evaluation of a stock’s current health as well as its potential to grow.
One downside to growth investing is the lack of dividends. If a company is in growth mode, it usually needs a capital to sustain its expansion. This doesn’t leave much for cash left to pay dividends to shareholders. On top of that, faster earnings growth also means higher valuations which are, for most investors, a higher risk proposition.
Momentum investing involves “riding the wave”. Momentum investors believe that winners will keep winning and losers will keep on losing. Thus, they search for stocks that are experiencing an uptrend. Since they believe that losers will continue to slip, they may choose to short sell those securities. On the other hand, short selling is pretty much a dangerous tactic.
Momentum investors could generally be considered as technical analysts, which means these investors use a strictly data-oriented approach to trading. They also search for patterns in stock prices in order to guide their buying decisions.
Thus, momentum investors are going against the tenets of the efficient market hypothesis, which states that asset prices fully reflect all the information that is available to the public. It’s difficult to agree with this assumption and still be a momentum investor because you are basically taking advantage of overvalued or undervalued stocks.
Dollar-cost averaging (DCA) is the practice of making regular investments in the market over time. However, it is not mutually exclusive to the methods we have discussed so far. Instead, it’s way of executing whatever strategy you may choose.
This approach becomes even more efficient when you are using automated features that do the investing for you. On top of that, it avoids painful and ill-conceived strategies of market timing.
Since the investments are made in regular increments, the investor capturing prices at all levels, whether high or low. These regular investments effectively lower the average per share price of the purchases.