Newbies will always hear about investment strategies when they get serious about investing. Choosing your investment strategy depends on your investment horizon (how far in future do you want to invest), and your financial goals.
Here are 3 investment strategies that are commonly used:
#1 Value Investing
Value investing is about looking for stocks that have strong fundamentals. This means looking at their financial reports for things like earnings, dividends, and cash flows. For a stock that is worth buying, it first has to be undervalued given their quality (i.e. selling at a bargain price). This also means comparing the current share price to the intrinsic value of the firm.
Value investing does not mean that investors should buy the stock when it declines in price because it is cheap. It is of utmost importance that you analyze the company’s financial reports as well as its latest news with a simple Google search. This is all part of doing your “homework”.
When a closer look at the financial statements tell you that the company’s financial ratios are weak, the price drop is due to weak fundamentals and not simply because it is suddenly cheap. But if you deem the firm’s fundamentals to be strong, yet there is a fall in their stock price, you might be buying it for a great bargain.
In value investing, profits are made by investing in quality companies. This means that you are not fixated on market volatility, or daily price changes (i.e. trading).
#2 Dividend Investing
Dividend investing is attractive because of the lower risk involved in dividend-paying stocks, as mature companies’ stock prices are less volatile. Investors who favour this method like a steady cash flow from their stocks, and reinvest the dividends by buying more shares.
Typically, the companies who pay dividends are financially stable and considered to be established in their industry. Investors get to enjoy dividend payouts while their stock prices appreciate over time. As stock prices increases, the company usually choose to increase their dividends.
Dividends come from cash. A sign that indicates that dividends will increase is a healthy cash flow. Although dividends are not guaranteed, when investors are confident that a company pays stable dividends that increases over time, the company will want to ensure this continues to keep their investors happy.
Check out this video for more information on dividend investing:
#3 Growth Investing
Investors interested in growth investing prefer companies who are expected to have their earnings grow at a higher rate compared to other firms in their industry or market. This strategy is also known as a capital growth strategy, because the large increase in capital gains is the goal here.
It is a belief that value investing and growth investing are opposites. Growth investors would usually be picking stocks of smaller companies that have yet to be at their prime. This also includes investing in companies that are in emerging markets.
Growth investors look at the company’s past financial performance and how they are performing compared to other firms in the industry.
Factors that may hint at large future capital appreciation:
- Strong revenue growth
- Good cost control by the management
- Good business model and way of operation
Check out Investopedia’s video for an overview on growth investing:
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