Common Stock Investing Strategies
This article aims to familiarize you with several investing strategies for common stocks. You can choose for yourself the ones that best meet your needs and financial goals.
Investing Strategy 1 - Buy and Hold
If you choose this investing strategy you will have to purchase a stock and be ready to hold it over a long period of time, since buy and hold strategy is based on the assumption that the price of the stock will rise with time. However, due to the dynamics of the market you can never be sure that this will happen. This investing strategy elaborates on the idea that the market will continue to expand due to its capitalist nature. As a result it assumes that the stock prices will continue to rise and shareholders will enjoy higher dividends.
The market fluctuations and inflation levels are smoothed over the long-term. The advantage of this investing strategy is that you pay less commission fees and taxes since you trade less. You hold the stocks for a long time and don't trade on frequent basis.
Investing Strategy 2 - Growth Investing Strategy
This strategy aims to identify the growth potential of a company. Companies with high earnings growth are very attractive to investors who believe that such companies will experience continuing rise in their stock price since more and more investors will want to take advantage of the regular and large dividend paying.
One of the most important factors for consideration in growth investing is the earnings per share of the company. Investors observe the changes in the earnings per share over the years not neglecting the revenue growth as well.
What is more, in order to get a clear view on the willingness of the market to pay for a given earnings growth, investors examine the relationship between the price/earnings ratio and the annual earnings growth.
Keep in mind that this strategy carries a certain degree of risk, since the target companies are usually young. However, as you know risk and reward go hand in hand, meaning the higher the risk the higher the potential reward from the investment.
Investing Strategy 3 - Value Investing Strategy
Value investors are often referred to as bargain seekers. This means that they search for stocks that are sold at a price that is below the real value of the company.
No matter what the current price of the stock is, be it $20 or $100, it should be below the real value of the company. Value stocks are those that have been overlooked by the market and as a result their price is lower. The latter may be caused by the chasing of the market after stocks that are currently considered to be more attractive.
Generally, growth and value investing are considered to be positioned in opposite sides of the investment spectrum.
Investing Strategy 4 - Timing the Market
The major idea behind market timing is the buying low and selling high. Market timers believe that they can successfully predict the behavior of the market regarding the price movement of stocks. This makes timing the market the opposite of the buy and hold strategy.
If you are to time the market, you should familiarize yourself with such tools as technical and fundamental analysis as well as even intuition.
Most financial experts are against timing the market because it is difficult to identify whether a particular stock price has reached its peak or bottom. It may eventually go even higher or lower.
Additionally, with the often trades that are executed under this strategy commission fees will greatly reduce your profits especially of you make frequent trades of small amounts.
Another disadvantage of timing the market is that in theory over the long-term the market goes up. Therefore, it is better to stay fully invested during the time in order not to miss the long-term stock rewards.
Investing Strategy 5 - GARP Investing Strategy
Growth at Reasonable Price (GARP) represents a combination between the value and growth investing strategies. Therefore, applying this strategy will involve the search of a stock that is both undervalued and has a potential for future growth. You may find it difficult to find such a stock due to the opposing characteristics of growth and value investing. However, it is not unattainable. Investors applying this strategy use the PEG (price-to-earnings-growth) ratio as an indicator for a stock that possesses a growth potential at a price that is below the real value of the company.
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