Investing in stock markets could be a sure-shot way of making extra money. Be it for retirement, college fund, or just for some extra income, investing in a well-balanced portfolio could be the key.
There are several trading strategies investors follow, however, if you are new to investing, it could be a little confusing. It is not necessary that one strategy that is successful for one investor would also be profitable for you.
Before deciding on a strategy it is important for you to be clear regarding your financial goals, time period of investment, and risk appetite. Only after this, you could choose a strategy tailor-made for you and your needs.
Let's take a look at some popular strategies investors use. Investors can also mix some of these strategies and come out with one especially suited to them.
Growth investing: It is one of the most common trading strategies used by a number of investors everywhere. In this, you pick stocks that reinvest your profits. Instead of profit booking, investors choose to reinvest their gains in the company improving their cash flow. Such firms generally do not pay out dividends. Re-investing in shares of the firm instead of exiting them, may over a time period increase the price of the stock, leading to a profit for the investor.
Income investing: In this strategy, you invest a percentage of your income every month to create an extra source of income. The percentage of your income you want to invest depends on your total income amount. If the income is less, you can start with a lower percentage and increase as it increases. Say you can start with 7-10 percent of your income and increase it to 15 percent as it rises. Now depending on your goal, you can invest for a certain amount of time and gather a lump sum amount at the end of it. A lot of investors also invest in dividend mutual funds or stocks, where you can receive regular dividends. You can also invest in quality stocks, mutual funds, debt funds, etc depending on your financial target.
Passive investment: In this strategy, you generally invest in passive investment tools like index funds for a long period of time. This not only helps create a balanced portfolio but also keeps the costs down since taxes are lower in long-term investments. Rather than betting on one stock, or a few stocks, which can prove to be volatile in case of market turbulence, index funds offer to invest in a whole index, so you get a basket of stocks that balances the stocks that are gaining or declining. It's one of the safest forms of investment and generally, people with low-risk appetites prefer this strategy. Returns in passive investment are generally in line with the markets.
Active investment: This is generally a strategy for investors who have a decent knowledge of stock markets. It is not usually recommended for beginners. Most experts advise that for beginners, no more than 10-15 percent of their portfolio be used in active investment. In active investment, traders buy and sell stocks depending on market movement. If there is a rise, they book profit and if there is a fall they buy on the dip. However, it is very important to have a deeper knowledge of stock markets for this strategy.
Trend investing: In this strategy, investors look for recent trends to make an investment. Suppose RBI is likely to hike or cut rates, investors will focus on rate-sensitive stocks. Another example can be that in case of a pandemic, or when the focus is on vaccines, investors may prefer looking at healthcare stocks. However, properly identifying trends and using them to make a profit requires a very intrinsic knowledge of the markets as well as the domestic and global trends.
Value investing: In this particular strategy, investors look for stocks that are undervalued but have great potential. Investors analyse the fundamentals like earnings, balance sheet, expenses of the firm to identify such a stock. Also, technical tools like price to earnings ratio, price to book ratio, return on equity, etc can be used to check if a stock is undervalued by the market or overvalued. Investing in stocks that have strong fundamentals but are undervalued can provide a great investment opportunity.
Quality investment: Unlike the previous one, in this strategy, investors look for stocks that have already proven their worth. Quality stocks with good fundamentals, stable and consistent profits, may even be dividends. Investors pick stocks of popular firms that are known for their excellence. Such companies are not affected heavily by market volatility and generally outperform in such scenarios. This is also a good investment strategy for investors with a low-risk appetite.
Long-term investing: This is one of the most basic forms of investment and most people already do it. In this people invest more in government schemes like PPF, NPS, FDs and other schemes that come under 80C. These are the safest forms of investment. Even though they do not provide great returns, there is no chance of a loss. Most of these schemes also provide tax benefits which is another win for an investor. In such schemes, you can invest in either lump sum or make regular deposits, depending on your income.
Now that we have learned about the most common strategies used by investors, you can pick which one suits you the best or make a combination, tailor-made for your requirements. Happy investing.