Understanding the stock market and how to profit from it can be a complicated topic of discussion. Over the years of the stock market history, multiple investing strategies have been created to help investors, day traders and businesses better plan their approach to building wealth.
Depending on your end objective for the money invested, you may choose to use a different investing strategy for funds that have different goals. Understanding multiple investing strategies will also give you an added edge to investing, as you will understand different approaches to entering the stock market regardless of the current strategy you choose to use.
What Are Investing Strategies Based On?
Most investing strategies are based on two different types of investment analyses; fundamental analysis and technical analysis. From that, there are different types of strategies investors might explore
Value investing seeks to find companies that investors believe is undervalued according to the current price. Investors using the value investing strategy look for the real intrinsic value of a company, or, the value the company is currently providing as compared to its current stock price. If they believe it is currently underpriced, an investor using value investing as a strategy will buy into these companies expecting the price of the stock to rise in the near future.
For example, XYZ Company may currently be trading at $100 per share. A value investor believes in XYZ company and thinks it is currently priced below what it’s really worth. They believe it’s actually worth $120 per share. Before investing, a value investor would look deep into the financials of the company such as some of the fundamental analysis techniques mentioned at the beginning of this guide and evaluate the real intrinsic value of each share of stock.
After analyzing the financial details of the company, they determine their original belief was correct and decide to invest in that company. Fast forward to a year later and the stock price reacted as the value investor predicted, and rose to $120 per share, resulting in a very profitable investment.
Growth investing seeks to find companies that appreciate much faster than the average company. Capital appreciation is the primary focus of the growth investing strategy. Rather than analyzing the current price per share of the company, growth investors look for signs that the company will continue to grow at a rapid rate and seek to “jump on the bandwagon” and ride the wave up.
What defines a company that is growing faster than average? To accurately compare how fast a company is growing, it must be compared to that company’s market industry and competition. The average growth rate will be the average of competition and other companies in that industry.
How is one to invest in growth companies? Often times, growth investors look for companies that are emerging in their market at a rapid rate. Other growth investors seek to invest in smaller companies that have not yet grown yet and analyze their current market potential and the vision the company has for the future.
Lastly, growth investors also look at stock companies that are currently in a “recovery” status. In other words, the company has had a rough past few years, and has dropped in value significantly. Often times, investors can identify companies that are starting to gain traction and improve their performance, showing signs of a prosperous future for the stock price.
Macro investing is also referred to as Global Macro Investing. Macro means on a larger scale, and micro being a smaller scale. Thus, Macro Investing seeks to invest in the stock market from a global perspective, looking at the economic and political outlook at different parts of the world and investing accordingly.
Macro investing is often used as a hedge fund, which is a fund where multiple investors pool their money together, and the active managers of that fund use aggressive strategies to grow the portfolio. Using a macro investing strategy doesn’t always just pertain to the stock market, it rather uses a mix of different asset classes like currencies, commodities, stocks and bonds on a global scale.
An example of how an investor may use macro investing as an investment strategy is by keeping tabs and being aware of global economics and politics. If, for example, a major event is about to occur in a country that may affect that company’s currency value, stock market, or commodities originated from that country, an investor could buy long, or short positions based on the expected outcome of the major event.
Macro investing strategies are, for the most part, shorter-term investment decisions where investments are bought and sold in a relatively quick timeframe.
Momentum investing seeks to invest in a current investment trend to profit from the rapid trend growth. Investors seek to capitalize from these trends buy entering the market with long trades if the market is in an upward trend (aka bull market) and selling short positions if the market is in a downward trend (aka bear market).
This investing strategy also uses many indicators talked about in the technical analysis to determine future movements of the stock market. These include support and resistance levels, triangle patterns, double tops and double bottoms, and head and shoulder patterns.
Furthermore, other technical indicators used in momentum investing are comparing the current prices to historic market averages. If the stock price is trading at a price higher than the average price from the last 50 days, then it’s a good indicator you are in an upward trending market (bull market). If the market price begins to decline below the 50-day average, it could be an indicator the momentum is ending. As market trends (momentum) begins to die down, investors sell securities whose momentum dies out and buys securities whose momentum is accelerating.
A popular way of analyzing momentum investing is using two moving average prices to indicate a buy and sell signal. Many investors will plot the 200-day moving average and the 50-day moving average on the price chart. If the 50-day average crosses the 200-day average, it’s a signal to buy as the momentum is increasing. If the 50-day average crosses below the 200-day average, it’s a signal to sell as the momentum has died down.
A dividend, as defined by Investopedia, “is the distribution of reward from a portion of a company’s earnings and is paid to a class of its shareholders.” Dividend investing is a strategy that seeks to invest in companies that offer regular dividends. Not all companies offer dividends, and not all companies that have offered dividends are required to offer dividends in the future.
A dividend investor uses the company historical reports on the number of dividends that the company has paid in the past and can accurately assume these companies will keep paying dividends. A dividend can also be looked at as a basic cash distribution by a company, to its investors based on the previous quarter’s profit performance.
Why would an investor want to invest in a company that offers dividends? The short answer is compound interest. In other words, when a dividend is paid out to investors, most dividend investors take that distribution and reinvest it back into that company’s stock.
If their investment has been growing at an 8% annual return on $100,000, that investor would see an annual growth rate of $8,000. If that company offers dividends of 2%, and the investor reinvested that 2% dividend (or $2,000), that investor would then be getting an 8% return on $102,000 rather than $100,000. Each time a dividend is paid, compound interest kicks in and the growth can be exponential.