Investments in markets are not on-the-spur-of-the-moment decisions. One may gain from on-the-spur-of-the-moment decisions. But this is not a viable strategy. It does not largely work. But there are time-tested strategies of markets which help you understand complexities of markets and take well-informed and well-analysed decision.
There are seven ways you make money in stocks, say experts. Each of these make for a good stock market investment tips and strategy. Though many books are written about each one of them, let us look at these strategies in brief:
- Value investing
It calls for buying a stock at a price which is at a significant discount to its fair value. The investor in such a stock believes that one day the stock market will realise the real value of the stock and the stock price will correct upwards rewarding a value investor. Dividend yield investing can be a sub-strategy of value investing.
- Growth investing
This strategy expects a company which has achieved a scale of operations and growth to grow further. Investors predict the growth of the company and buy the stock to benefit from the future growth. Sometimes the price paid may appear high in the short term. However, in the long term it is rewarding for investors as such companies deliver growth in line with expectations. It works best in sectors or economies showing high growth rates.
- Momentum investing
Rising stock prices attract many eyeballs. Many chase stocks that trend upwards. Following a theme which is the flavor of the market without one’s own personal conviction or understanding is termed as momentum investing. Using quantitative data, investors identify stocks that are in uptrend and then buy them hoping to continue with the trend.
- Quality-focused investing
This has gained prominence in the last couple of decades. Stocks of companies that are very well managed depict the sturdy nature of business in the form of solid fundamentals. These ‘Quality’ companies are less volatile and offer stable returns in the medium to long term. Though they are priced to perfection in many cases, there are less possibility of negative shocks. ESG – Environmental, Social and Governance (ESG) focused companies are also high quality companies.
- Investing in Size of the Company
If you have been investing in equity mutual funds, then you must have heard terms like large cap, mid cap and small cap. Investing in different size of companies offer different outcomes. For example, though the investments in small-sized companies may offer disproportionate returns, they tend to be volatile when economy is a weak phase. Investments in share of large-sized companies can cap the downside of your investments and provide you stable returns.
- Low volatility
Focusing on stocks which have low or little volatility also works for some investors. These stocks sometimes offer better cash flows, sometimes they offer quality business and in some cases they tend to be predictable in nature. Whatever be the reason, there is always demand for low volatile shares. Owning them is a wise decision.
Especially institutional investors such as mutual funds and insurance companies--use these strategies or follow a blend of these strategies to build their portfolios. You may follow this approach. In the initial years you will do well if you stick to one strategy to select stocks. Though each strategy does not do well at all times. Investors who stick to a strategy for a reasonably long period of time are likely to gain from it. This is because in markets there are situations when a strategy becomes relevant.