4 Key Stock Investment Strategies

June 10, 2022

There’s really a lot to learn about investing when you start out independently. However, there are tried-and-true methods for making things easier. With a great investment strategy, you’ll be able to focus on other aspects of the investment process, which then gives you more time to spend on things that you love to do.

Strategies for investing in the stock market might be likened to outfits you could don at a cocktail party. People have varied preferences, and what works for one person may not work for another.

In addition, the primary function of a party dress stays the same regardless of style and fashion statement. Even investment plans can be customized to meet the needs of the individual investor. In each scenario, the goal is to generate a profit from the investments. Trading in the markets occurs when an investment is made with the purpose of buying at a relatively lower price and then selling it at a greater price later on. The stock market provides plenty of opportunities for traders to do this.

The following are four well-known investment methods, along with some of the benefits and drawbacks of each.

Growth Investing

At the top of our list is growth investing, which looks at how a stock, sector, or industry will grow in the future. When you invest in growth, you bet on the company or industry with the most potential for growth in the future and the ability to take advantage of growth opportunities to get results and move forward on the path to success.

Most of these companies can be found in the midcap and small-cap sectors. It’s like a venture capitalist evaluating a company, but the company is listed on the markets.

Who benefits from growth investing? Growth investing is riskier by nature and usually does well only in certain economic situations. This type of investing is best for people who want to invest in companies with a shorter time horizon and more potential than value companies. Growth investing is also suitable for people who don’t care about cash flow or dividends from their investments.

PROs	CONs
Growth stocks and funds try to increase their value in the short term. When you make money, it usually happens faster than with value stocks.	Most of the time, growth stocks are more volatile. Even when things are going well, a company’s stock price will go down if it isn’t growing.
When growth companies begin to expand, their stock prices often rise sharply and dramatically.	Depending on the economy’s status as a whole, it may be good to hold on to growth stocks for a long time. For instance, when interest rates go up, companies that are trying to grow lose money.
Growth investing doesn’t depend as much on technical analysis, so it can be easier to get started.	Companies that want to grow need money to do so, so don’t expect dividends.

Value Investing

Value investing is a trading strategy that is based on financial analysis and requires investors to stay in the markets for a long time. The main goal of value investing is to figure out how much a company’s stock or share is really worth and choose stocks that are undervalued and being sold for less than they are worth.

Value investing looks for these gaps in the market and tries to take advantage of them. This is because value investing is based on the idea that stock prices will always move toward their fair value.

This is also the most basic way to invest, and it has helped many investors become successful and wealthy, including Warren Buffett, who is known as the “Oracle of Omaha.” People think of value investing as a passive trading strategy because it adds value over a long time. The value investing strategy has the potential to give investors huge returns, but it also comes with risks.

Everything depends on how a person chooses which stocks to buy. There are many indicators that can help you decide which stocks are good for value investing, but picking the right stocks for value investing often takes more than just understanding indicators.

PROs	CONs
Most of the time, companies with more value have better risk-reward relationships.	It can be challenging to find companies with good value, especially since earnings can be inflated by how accounting is done.
Fundamental analysis is the basis of value investing, and financial metrics are often used to back it up.	Value investments take time to work out, so investors need to be more patient.
Since they don’t need as much cash to grow, value companies are more likely to pay dividends.	Even if you hold for a long time, there’s no guarantee of success. The firm may even be in pretty bad shape than before.

Momentum Investing

Momentum investing is a strategy that involves making investments based on how the markets are moving. Momentum traders would buy stocks before a possible uptrend and sell them before the markets went down.

They would then buy the stocks again later when they were cheaper. It’s called “short selling,” when you sell something first and then buy it later. Technical analysis is the most useful tool and method for a momentum trading strategy. It can predict the next trend in the markets with a fair amount of accuracy. This type of trading strategy is a more active one.

There are fixed levels for buying and selling, and orders need to be placed at the right times. Compared to value investing, it can be a riskier strategy, but the tools for technical analysis make it easy to choose stocks and make trades quickly.

PROs	CONs
Momentum trading gives you a better chance of making short-term gains with higher risks.	Momentum trading requires a lot of skill to know when to get in and when to get out.
Momentum trading is done over a short period of time, so there’s no need to tie up capital for a long time.	Momentum trading depends on how quickly prices go up or down. If prices don’t change quickly, there may not be good trades to be made.
This method of trading is thought to be easier because it doesn’t depend on things that happen in the bigger picture.	Depending on how you invest, the risk of making short-term capital gains is higher.

Dollar-Cost Averaging

This plan involves making regular investments in the market over a long period of time. Dollar Cost Averaging strategy doesn’t believe in putting all the money in the market at once. Instead, it puts the money in the market at different times. Blue-chip company stocks and defensive stocks, which are sure to grow strongly and steadily, are the most common types of stocks that people like to invest in regularly.

When you invest in the stock of the same company at different times, you can average out how much each share of stock costs. Cost averaging is best for people who want to save over time but don’t have a large lump sum to invest in the market.

PROs	CONs
DCA can be used with the other strategies already mentioned.	It can be hard to automate DCA if you don’t know your broker’s platform well.
When prices go down, your average cost basis goes down, which means you could make more money in the future.	When prices go down, your average cost basis goes down, which means you will owe more taxes in the future.
DCA takes the emotion out of investing by requiring investors to make regular investments no matter how the markets are doing.	Investors may be tempted not to keep an eye on DCA strategies, but all investments, even those that are automated, should be looked at from time to time.

Key Takeaway

All of these investment strategies can also be done at the same time to make the most of the investment opportunities on the market. If you’re an investor with a good amount of money to put into the markets, you can split your money between each of these investment strategies to make money from the markets.