There are several ways you can invest in the stock market. Here, we look at some of the most popular stock market investing strategies.
Fundamental Investing
Imagine you are following the spelling bee competition in the USA. What’s the easiest way for you to place a bet on a group of students who might hit the top percentile of the competition? It’s simple: You look at all the external factors that can impact different groups. Do they come from schools that have enough funding? Do they come from schools where education is given more priority than sports? Are their cities going to be hit by any natural calamities?
If the answers to all of these questions are yes, yes, and no, it’s a safe bet to take. That, in a nutshell, is a fundamental investing strategy. As a potential investor, you look at anything that can affect a company’s stock price: From macroeconomic events like a country’s economic policy to micro factors like the company’s management plans.
Technical Trading
Technical analysis is when you look at numbers and statistics to determine where the next spelling bee champion is going to come from. Does this school have an old record of participating in the spelling bee? How many rounds do the students clear on average in the competition? How many champions has the school produced?
When you have all this information, you are able to make a calculated guess about the prospects of the students from that school. That is exactly what technical analysis in trading does. You look at the price of the share, the volume (number of shares traded daily), and other signals that help you determine the future of the shares.
Dogs of the Dow
Assume 1,000 schools are going to participate in the Spelling Bee. You don’t have time to do either a fundamental or a technical analysis. What do you do? You simply take the top 10 schools that have won the most in the last decade and bet on them.
In the investing and trading world, the Dow of the Dogs is a strategy where you allocate investments in 10 companies that pay the highest dividend yield on the Dow Jones Industrial Average or DJIA.
As dividend yields are stock prices are inversely related, companies with the highest yield may be near the bottom of their business cycle and ripe for a turnaround. Basically, their stock prices should increase at a faster pace than companies with low yields.
Value investing
This is where you pick out winners for the long term. Value investing is identifying stocks trading below their intrinsic value. These stocks may have been negatively impacted for reasons unrelated to the market and have been forgotten.
For instance: Facebook. The company is constantly under scrutiny from regulators and agencies. This has never let the stock reach its true potential. The stock trades at a lower multiple compared to the S&P 500. You could have literally jumped into the stock at any point from its IPO in 2012, and you would have made a handsome profit on it. Facebook is an example of a true bargain or value stock.
Momentum Investing
Sometimes, during the Spelling Bee, there is a student who has come out of nowhere and is riding their skill and luck all the way to the top. The student doesn’t have any record, and there are no external factors that are propelling the student forward either.
However, the student has caught momentum and is in the ‘zone.’ That is pretty much the case with momentum investing. Sometimes, a company like AMC catches investors’ fancy, and its stock price surges.
The stock doesn’t have great fundamentals, and its technicals don’t make sense either. It is not a bargain because it is not undervalued, but it is in the news, and people are buying it. Momentum investing is often a short-term play.
Growth Investing
Growth investing is when you look at companies that are poised for, well, growth in their sectors or markets. Sometimes, market conditions are perfect for a sector to grow. For instance: The pandemic saw the growth of companies like Shopify, Zoom, Slack, etc. as they benefited from economic shutdowns and the shift toward remote working conditions.
You need to identify companies that are market leaders or have a disruptive product and are part of a rapidly expanding addressable market, allowing them to grow revenue and earnings at a stellar pace.
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