There are different types of investment strategies or methods used in stock market. Investing always refers to long term investing only because investing for short term is generally categorized in trading, either in swing trading or positional trading but could not be included in investing. This is the basic difference between Investing & Trading. If you want short term gains then you can focus on short term trading. In this article we will discuss about basic methods of different types of investing techniques. Also you can Check out this article for different types of trading techniques.
Table of Contents
- Basics of Long-term investing
- What is Value Investing
- What is Growth Investing
- What is Dividend Investing
Basics of Long-term investing
If you buy any stock and hold it for five years or ten years or at least for more than one year then it is known as long term investing.
Legendary Investor Warren Buffett says “If you couldn’t think of holding any stock for at least ten years then don’t even think about owning it for ten minutes.”
Long term investing is the actual way for good wealth generation from the stock market. In the short term you may expect 10%, 20% or 50% returns but if you want actual multibagger returns, that is double, triple or even more, then you have to hold it for long term. In the short run you can not predict the movement of any stock perfectly but good businesses with healthy fundamentals and growth prospects will definitely rise in future. That may take one year, two years or may take more time but the market will definitely appreciate their value and performance and their stock price will rise.
Therefore most of the big investors focus on long term investing. Warren Buffett says “Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time: You can’t produce a baby in one month by getting nine women pregnant.”
Patience is the key factor for success in the stock market and if you have confidence in your stock fundamentals then only you can hold it with patience for the long term. Warren Buffett says “The stock market is a device for transferring money from the impatient to the patient.” So first you have to learn how to analyze fundamentals of any stock. You can check our articles on some basic concepts of how to select good stocks to invest in.
There are various techniques of investing according to investor psychology. You can adopt them or mix them as per your strategies, there is no fixed rule to adopt any technique. Here are some of them.
What is Value Investing
Value Investing is the way in which investors purchase any stock when it is available at a good price.
Sometimes due to any negative sentiments in the market or due to panic selling in the market, stock prices may fall. This is the time when value investors pickup those stocks which are available at a good price.
Warren Buffett says “be fearful when others are greedy and be greedy when others are fearful.” When there is fear in the market most of the impatient investors sell out their portfolio stocks in panic, but wise investors don’t fall on market sentiments rather they focus on fundamentals of stocks and gather good stocks when they fall.
But all those stocks which are available at lower prices may not go upward, some of them may go more down or some of them may go bankrupt. There is no guarantee that the price of all the stocks will go upward in the long term.
Therefore Warren Buffett says “it is far better to buy a wonderful company at a fair price rather than to buy a fair company at a wonderful price”.
Hence we should select fundamentally good businesses with good financials for long term investing. But finding good stock at lower valuation is difficult, so we can pick them up when they are available at a fairly good price level.
There is no certain way to make a valuation of any business and also we require a lot of information to find out its proper valuation, so different investors take different methods to check valuation of any stock. The best ways that most of the investors use to determine the valuation of any stock are the Price to Earnings ratio (PE Ratio), Price to Book ratio (PB Ratio), Intrinsic value etc. You can check these in any of the stock analysis apps, most of the broker’s apps also provide the PE ratio and PB ratio of stocks in the stock fundamentals section.
What is Growth Investing
Growth investors generally focus on those stocks which have high growth potential in future rather than its stock price. They mostly focus on capital appreciations.Those businesses which work on futuristic projects may show multifold rise in business in future. Investors analyze their future business potentials, earning growth, their research and development skills to adopt new technologies and various macro and microeconomics factors which may affect its business in future.
Generally growth investors focus on midcap and small cap stocks because they are mostly emerging businesses and smaller in size hence have more growth potential than large businesses. They have more space to increase market share and business expansion opportunities. But these stocks are more volatile and risky because of their small size. If they could not compete with their larger competitors then they may not survive in future. Another drawback of growth stocks is they generally don’t give much more dividends hence we could not expect any regular income from our investment, the only thing we expect is capital appreciation.
Growth investors generally consider stocks with higher Return on Equity (ROE) and higher Return on Capital Employed (ROCE). You can check the ROE & ROCE of stocks in stock analysis apps.
What is Dividend Investing
There are other methods also for long term investing like Dividend Investing, in which investors focus on higher dividend paying stocks by which they will get a good regular annual return. For which investors select stocks with higher dividend yield. But all those stocks which offer higher dividend yield may not have good fundamentals hence might not give good capital growth in future. Therefore we must focus on fundamentally good stocks with higher dividend yield (preferably more than 1%) if we want regular dividend income.
To know more about short term trading you can check our article “different types of trading in stock market”. And if you want to know how to select good stocks for investing then you can check this article.
Disclaimer – Investing and trading in stock market is subject to market risk. We have to learn all the risk factors before making any investment decisions. This article is only for basic knowledge about stock market investing for educational purposes only and not any type of recommendation. In case you need any professional advice please consult your financial advisor. That’s all in this post, if you like our post please share with your friends and thanks for visiting our page. Wish you all happy investing.
