Stock Trading

Different Types Of Trading Strategies

You cannot have a steady stream of income by investing in stocks unless you have a reliable strategy. You are also not limited to using a single strategy. You can combine the following strategies, modify them, or even come up with your own. The important thing is that you use a strategy to turn the odds in your favor.

 

Fundamental Analysis

Anyone who has invested in stocks or any business has probably encountered this strategy. This is one of the most common and effective strategies that you can use. Fundamental analysis focuses on the fundamentals of the company concerned. After all, the performance of stocks in the market primarily depends on the performance of the business. Hence, this strategy involves examining the cash flow and financial statements of companies. To a certain degree, this strategy also takes into consideration the quality of the company. However, the main focus of this strategy lies in the numbers. When you use this strategy, your objective should not be merely to earn from the capital gains but to receive all the benefits of owning a prosperous company.

 

Technical Analysis

If you are not fond of numbers and would rather deal with something more visual, such as graphs and charts, then you might like technical analysis. This strategy deals with analyzing graphs and charts which show how the prices of stocks fluctuate within a given time period. It is believed that the many factors that affect the performance of stocks have their accumulated effect on the price. Therefore, by understanding the changes in price alone, you can understand the market without having to bother yourself with too much data. This is also a recommended strategy for short-term investing.

When you use this strategy, the key is to look for a pattern or trend. You should then take advantage of this pattern. Take note, however, that patterns come and go. In fact, there are times when you may not be able to see any pattern at all. A common mistake committed by many investors is that they force a pattern. They create a pattern in their mind even when none actually exists. This is, of course, a grave mistake. You need to keep an open mind. If there is no pattern to be seen, then wait it out until a more promising situation arises. Do not look for a pattern if it is not there.

 

Value Investing

This strategy is about investing in a company that is currently trading below its true value. For example, if the actual price of the stocks of Company A is $25 per stock but the stock market exchange only shows that its stocks are only worth $15, then it must be a profitable investment. The key here is to be able to find the wrong valuation and take advantage of it.

When you use this strategy, you need to look for stocks that have strong fundamentals. Find stocks that have a high quality but are being sold at a bargain. The theory here is that the market will soon correct itself. Therefore, if the correct value of a stock is $25, but it is only priced at $15, then its current price will soon increase.

Take note that when you use this strategy, you do not just look for stocks that are selling at a low price. To be considered a good bargain, the stock must have a good quality but is selling at a low price. Therefore, if the stocks of Company A used to sell at $23 per stock, but then they now drop to $14 per stock, it does not mean that they are good stocks to invest in. In fact, such drop in price signifies a serious problem in the company.

 

Growth Investing

This strategy became popular in the 1990s, during the time when technological companies were on the rise. Back then, many investors who applied this strategy were able to get a huge amount of profit. It is to be noted that this strategy is riskier than other strategies.

The best way to understand this strategy is to compare it with value investing. While value investing focuses on the present moment, growth investing focuses on the future. This is the reason why a growth investor may buy a stock that is currently trading higher than its actual worth. Again, a growth investor looks into the future. This is because when he sees that a particular stock will trade at a higher price in the future, then the investment that you make today can be considered a profitable one.

When you use growth investing, the best stocks to invest in are those that have a high capacity to grow. Therefore, growth investors pay special attention to small and new companies. This is because small and start-up companies have a big potential and space for development.

 

Qualitative Analysis

This strategy gives primary focus on the quality of a company. You need to consider the people who manage the company, their character, and where they come from. The reason is that a company, no matter how good it is, will not do well if it is badly managed. It also takes into consideration the management philosophy of the company or the style by which the people of the company intend to achieve its goals. Pay attention to the managers of the company, their background, and experiences. Are they experienced enough to do the job? Do their experiences fit with their responsibilities? You should also consider the labor force. Are the people who function as the arms and legs of the company competitive enough to their job? It may be hard to understand numbers all the time. Sometimes it is easier to estimate people. This is where qualitative analysis comes into play. For example, a company that is composed of the best business people in the world would have a high rate of success. Accordingly, there is a good chance that the price of its stocks will increase, which makes it a good investment.

 

Stock Split Advantage

A company usually declares a stock split when the price of its stocks gets too high that is no longer attractive to investors. When the price of stocks gets too expensive, it tends to project an image that it has already reached its peak and make people think that the stocks are no longer a good investment. Also, when the price of stocks gets too expensive, it tends to discourage investors from buying them.  Hence, a company will declare a stock split.

So, how does a stock split work? For example, if you have 30 stocks at $20 each and a stock split is declared, then you will end up with 60 stocks at $10 each. It is a fair division. The number of stocks will increase after the split, but their price will also decrease. It is worth noting that a stock split is not limited to dividing a stock into two. A stock split may divide a stock into three or even more splits.

The way to use this strategy is to examine a company that has just declared a stock split. If the stock split was legitimately done due to a flourishing business, then the stocks of that company may be a good investment. Of course, you should also find out as much as you can about a company and make your analysis. Relying on a stock split alone is not a good idea.

You should be aware of the reverse split. The reverse split is also like a stock split but in reverse. Unlike a stock split, a reverse split is a bad sign. Remember to stay away from companies that use a reverse split.

Here is how the reverse split works: if you have 10 shares of stock at $10 each in Company X and a reverse split is done, then you will end up with 5 shares at $20 each. As you can see, the price of the stocks has increased significantly. A company may use a reverse split to entice investors to make an investment. But, as you can notice, it is actually a fraudulent move. The increase in the price of stocks is not caused by any progress or development in business but merely by mere manipulation. Of course, a company who exercises a reverse split may be successful in the future. However, such act is a sign that the company is already struggling at the present time. Although success is still possible, investing in a company that uses a reverse split is too risky. After all, you can find other companies to invest in.

 

Income Investing

The key to this strategy is to find well-established companies that have a steady stream of income. Take note that when you invest in stocks, you become a part-owner of a company business. This makes you entitled to receive dividends. When you use this strategy, you should look for big and well-established companies that no longer seek expansion. Instead of using the company earnings for the expansion of the business, these companies pass dividends to stockholders. A good example of this kind of company is Johnson & Johnson.

An important note when you earn income from dividends is that in most states such earnings that you receive from dividends are taxable at the same rate as wages. Therefore, you can expect for a higher tax than that imposed on capital gains. Check the laws of your state to be aware of the tax laws that may be applicable in your situation.

 

Stock Mastery

This strategy is something that you adapt for a long period of time. The way this works is that you need to choose a particular stock or company, and you need to study it every day until you have a really good understanding of how that particular stock works. Take note that the more you know something about a stock, the better that you will be able to predict its behavior — and this is the key to profit. Should you choose to use this strategy, take note that this should be a part of your day-to-day activity as an investor. It is worth noting that you should not rush in making any investment. Remember that you are not obliged to place an investment. Therefore, to increase your chances of making a profit and avoid losing your investment, only make an investment when you are sure that the chance of success is high. Otherwise, just wait it out until you find the best time to invest.

 

CAN SLIM

CAN SLIM is an acronym that stands for Current quarterly earnings, Annual earnings growth, new product, service, management, or high price, supply and demand, Leader or Laggard, Institutional sponsorship, and Market direction. According to this strategy, by simply looking at these factors, you can pinpoint the best stocks to invest in.

So, how do you apply this strategy? The first step is for you to identify stocks that have a quarterly earnings increase rate of at least 25%. Since you also need to be particular with the growth of the company for a long term, you should also consider the annual earnings growth of the company. This strategy recommends that you should look for a company that has 25% annual earnings growth (minimum) for the past five years. You should also keep watch of companies that offer something that is new to the market. Studies show that one of the common characteristics of the best stocks performers is that their companies have something new to offer to the market. You should also pay attention to the rule of supply and demand. If a limited product has a high demand, then the effect is that its price will increase. In business, this rule of supply and demand is always present. The next thing that you need to identify is where the stocks are coming from. Is the company considered a leader in the industry or a laggard? Of course, your aim is to get your stocks from a leader. Therefore, when you use this strategy, only get your stocks from reliable and well-established companies. This does not mean that you should completely ignore new companies. After all, there are a good number of start-up companies that have a potential to make it big in the market. Many activities in the stock market also come from mutual funds and pensions, so also keep your eye on institutional sponsorship. Lastly, keep your eye on the market trend. If you can read the trend and take advantage of it just before it changes, then you can turn it into a goldmine for profit.

 

Averaging Down

This is an aggressive strategy, so be careful when you use this strategy. The way this works is as follows: You pick a set of stocks that you think would be profitable. Now, if the price drops, you then buy the same stocks again. If the price decreases again, then make another buy order. Your advantage here is that you get to buy the stocks at a lower price each time. Of course, such is caused by the decrease in the price of the stocks. So, how do you profit? You profit once the trend goes upward. This means that you will profit a big amount when the value of the stocks increases and shoot up above its original price (the price when you first invested). Since you have bought the stocks at a “bargain” each time the price went down, then you can expect to get a big profit when the price shoots up. Considering the volatility of the stocks market, this behavior is considered normal and expected.

Although this may seem like one of the best strategies, you should be cautious of using this strategy. The problem here is that there is always the possibility for the price of the stocks to keep on dropping. It may drop too low that you will already run out of money before the trend changes; and, even in the case that it becomes favorable, it may no longer be able to recover its original price.

 

Buy and Hold

This is a common way of investing in stocks. It is believed that although it is difficult to tell the direction of the stock market for a short-term period, you can expect for the prices of the stocks to increase in the long run. This is because everybody in the stock market is aiming for that direction. Hence, it is argued that if only you can hold on to good stocks for a longer period, then you can enjoy profits in the future. This is the expected outcome considering that a capitalist society is involved. Take note that since you will be holding the stocks for a longer period, then it means that you will also be trading with less frequency. Therefore, you will have lower cost and taxes to worry about.