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3 Investing Strategies New Investors Should Learn

3 Investing Strategies New Investors Should Learn

The controversy surrounding the Gamestop stock saga has motivated many small investors to try their hand at the stock market. While some new investors may get lucky jumping straight into the market, most will have more success if they study sound investing strategies before they start making trades. These are three investing strategies new investors should learn.

1. Value Investing

Value investors look for stocks that they think are undervalued. This strategy depends on the belief that market prices are partially driven by irrationality, which creates the opportunity to purchase a stock at less than its true market value and then make money by selling it when the price goes up. Beginning investors may benefit from purchasing value mutual funds, which contain a variety of stocks that the mutual fund managers have determined are undervalued. Many of these funds follow the Russell 1000 Value Index

The downside to value investing is that switching strategies may be a costly move. To make money as a value investor, you must be willing to hold your stocks long-term. If you decide to do your own stock picking, be prepared to evaluate decades worth of trends to spot the businesses that you believe have growth potential. One guideline many value investors follow is to choose stocks with low price-earnings ratios. However, because this ratio can be affected by inflated earnings numbers, it is best to use a comprehensive strategy, rather than rely on the P/E ratio alone. 

Value investing works best for investors willing to make long-term investments and do a significant amount of research before picking stocks. When done right, value strategies often outperform growth strategies. 

2. Growth Investing

Growth investors choose stocks that they believe have the most growth potential. To be successful, growth investors must be able to analyze both the current health of a stock and the stock’s growth potential. Growth investors do this by analyzing industry trends. Growth investors look for evidence that there are high levels of demand for the company’s products and services that is likely to continue increasing. When picking growth stocks, you should look for stocks with recent strong and consistent earnings. 

One of the downsides to growth investing is that while companies are growing, they don’t usually pay dividends on their stocks. Additionally, the stocks of growing companies usually cost more to purchase, which means investors need to risk larger amounts of money than with value stocks. 

While growth investing does not usually produce as high of returns over the long-term as value investing, investors who can identify “sub-periods” where growth stocks outperform value stocks can reap larger returns. Growth strategies tend to be the most successful during times when gross domestic product is decreasing. 

Research has shown that growth stocks tend to perform well when interest rates are falling; however, they also tend to be the hardest hit when there is an economic downturn. Growth investors should also consider the competence of a business’ executive team. Growing a business is very difficult and highly effective leadership, such as successful investor and business builder Bill Malloy San Diego, is needed. Investors should be wary of companies that produce products that can be easily replicated by competition, because once the competition catches up, growth may stall. 

3. Momentum Investing

The underlying philosophy of momentum investors is that stocks that are going up tend to keep going up, while stocks that are going down tend to keep going down. Momentum investors look for stocks on an upward trend. Some momentum investors choose to short-sell stocks they believe will continue to decrease in value, but short-selling is a high-risk strategy. 

Momentum investors rely on a data-driven approach and use technology to spot patterns in stock prices. One of the challenges to making money using a momentum strategy is that frequent buying and selling results in high brokerage and commission fees. Momentum investing is a short-term strategy that involves building profits over months, rather than years. An upside is that research has found that a simplified momentum strategy can provide positive results with as little as a $5,000 investment. 

Short-selling is an aggressive form of momentum investing in which investors borrow shares of a stock they expect to drop in value. The investor immediately sells the borrowed stock at the current market price and then waits for the price to drop. When the price drops enough, the short-seller purchases the stock at a lower price and returns it to the lender. The difference between the initial selling price and the lower purchase price is profit. However, this is a risky strategy because if the price goes up instead of down, the short-seller could lose a substantial amount of money.

The best strategy for you will depend on how much money you have to invest, how much risk you are willing to take and how much research you are willing to do. These are just three of the many strategies you can try out. 

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