Choosing a Stock Market Investing Strategy

For investors and anyone interested in the accumulation of savings and wealth, few topics are more interesting than stock market investing and developing a strategy for success. Over the long-term, stocks have proven to provide the highest potential returns with the opportunity for both capital appreciation and income (through dividends). On the downside, stock market investing can be very volatile with the prices of stocks often experiencing wild swings in the short-term. Employing a stock investing strategy that supports the goals and risk-tolerance of the investor is a critical part of any investor’s planning process.

Stock Market Investing Strategies

Some of the best-known strategies for picking stocks include:

Fundamental Analysis: In a fundamental analysis strategy, investors choose companies based on a review of its financial statements, its industry, and the economic conditions associated with the market in which the company operates. Fundamental analysts often start by looking at macroeconomic factors to identify the industries that are well-positioned for success and then finding the strongest companies within those industries. This is known as a top-down approach.

Technical Analysis: Technical analysis is about predicting the future direction of stock prices based on past trends. Price and trading volume are the two primary factors for consideration as technical analysts employ models and rules based on the price guidance they believe they get by reviewing historical behaviors. Relying mostly on charts, this approach does not consider company or market conditions.

Value Investing: Value investing is the pursuit of finding under-valued stocks with the belief that the market does not always operate efficiently. Value investors are concerned with fundamentals; including dividends, earnings growth, and cash flow as the primary determinants of stock price. The goal of the value investor is to arrive at a real or “intrinsic” value of a stock for comparison against the current share price to determine whether the stock presents an attractive investment opportunity. Value investors are usually prepared to buy and hold the stock as the market corrects the price of the stock.

Growth Investing: Growth investing can be seen as an investing approach where the price paid for the future growth of a stock is less than the actual value of that growth. Investing in growth stocks is about finding companies whose earnings are expected to grow at a rate that will exceed the company’s industry or the market as a whole. Growth investors are typically not concerned with income from dividends, focusing instead on the potential for capital gains.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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