Many investors make millions in the stock market. Here is a brief guide on the best Best Tips on Investing Strategy in the Stock Market. This article will explain the investment strategy in stock market investing.
- Stock market have been the most important creators of wealth in the United States. Without Wall Street, wealthy people like Warren Buffet, Bill Gates, and Jeff Bezos would not be where they are today.
- They are successful because Wall Street trusted them with its money by investing in the companies they started.
- As shown in the chart below, since 1987, the Nasdaq, S&P 500, and Dow have returned more than 3000%, 1000%, and 800% respectively. This is excluding dividends.
Stock Market Investing Strategies
The stock market is significantly big, which means that investors use different types of strategies to make money. Broadly, these strategies are divided into a number of ways. There are stock market strategies based on the size and stage of the companies, the industries, duration of investments, and the timing of the investments.
Investing Based on the Stage of Companies
All companies listed in the New York Stocks Exchange (NYSE) and Nasdaq are not created equal. These companies are usually at the different stages in their cycle. These companies are usually divided into three.
- Growth companies are relatively new companies that are experiencing increased growth. Most of these companies are usually highly unprofitable as the management use the cash flow to fund growth. Examples of such growth companies are Amazon, Uber, Facebook, and Chipotle Mexican Grill. At this stage, investors don’t focus on the profits and the earnings generated by the companies. They focus on the revenue growth.
- Value-focused companies are large companies that have been in the industry for a while. They are usually high quality companies but in industries that are not considered sexy. Investors like Warren Buffet have made a fortune by focusing on these companies. Examples of such companies are Coca Cola, Pepsi, and Unilever.
- Income companies are those that are known to return funds to investors through dividends. These companies tend to have no or low top-line growth but because they are mature companies, they tend to have a lot of free cash flow. Examples of such companies are Real Estate Investment Trusts (REITs), which are mandated to return money to shareholders every year.
Investing Based on Size of Companies
There are investors who invest based on the size of the companies and who focus on companies like Apple and Microsoft, which have market capitalizations of more than $100 billion. These are known as mega cap companies and are known to be mature, stable, and growing companies.
Other investors again specialize on large cap companies, which are those companies that have a market capitalization of between $10 billion and $100 billion. Examples of such companies are Goldman Sachs, Mondelez, and Chipotle Mexican Grill.
Companies that are valued at between $1 billion and $10 billion are known as mid-cap stocks and include companies like H&R Block, Carvana, Stitch Fix, and Box.
There are others who invest in small cap stocks, which are valued at between $100 million and $1 billion and those who invest in small cap stocks, which are usually valued at less than $100 million. These penny stocks are usually high-risk companies whose stock tends to fluctuate.
Investing Based on the Industry
As mentioned, companies are not the same in the US stock market. Therefore, there is a much used investment strategy in the stock market that has to do with the type of industry. There are for example investors who specialize on finance related stocks and others who specialize on technology stocks.
Other main groups of stocks in the US are retailers, pharmaceuticals, real estate, consumer staples, consumer discretionary, IT, materials, and energy. These companies are usually not valued the same way.
Technology companies like Facebook usually have a higher price to earnings ratio compared to energy companies like Exxon and Pioneer Natural Resources. There are investors who focus on a single industry and others who diversify across the multiple industries. In addition, there are those who buy sectoral indices or ETFs.
Investing Based on the Duration
Another stock market investing strategy is based on the duration of the investments. In this, there are investors like Warren Buffet and Bill Ackman who are known to buy stocks and hold them for years. These types of investors are usually more patient and believe strongly in the companies they invest in. They follow a buy and hold strategy and are often very successful.
There are others who buy stocks and sell them within a short duration. These are known as swing traders because they mostly focus on the technical types of analysis. Finally, there are day traders who buy and sell stocks within a single day.
Investing Based on Timing or Opportunities
There are investors who focus on the timing or the opportunities that emerge in the stock market. For example, there are merger investors who focus on the divergence that happens when a M&A deal is announced. In most cases, they buy the stock of the company being acquired and short that of the acquirer. Others invest in companies during the earnings season. This is when these companies release their earnings.
In addition to these, there are investors who are long only. This means that they only buy stocks they believe will go up. There are the short only investors, who only seek to find overvalued companies or those with structural issues and short them. A good example is Jim Chanos, who has made a name for shorting companies like Enron, Valeant, and Tesla. There are the long-short investors who buy stocks they believe will go up and short those they believe will fall.
The strategies described in this article are some of the most popular ones. However, among sophisticated investors, there are others such as activist investing. This is where they invest in a company and advocate for changes that will unlock investor value. Examples of investors who have made a name as activists are Bill Ackman, Dan Loeb, and David Einhorn. As an investor, if you are not good at picking stocks, we recommend that you invest in Exchange Traded Funds (ETFs), index funds, and mutual funds. These will give you enough diversification and impressive returns in the long run.
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Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.