Stock Investment Strategy

This guide offers a comprehensive breakdown of each type of stock investment strategy that investors and traders use to decide what stocks to buy and sell. They vary greatly by selection criteria, fundamental analysis based or technical analysis based, length of holding period, what the goal of the investment strategy is.

1. What is a Value Stock Investment Strategy?

Value investors actively seek stocks of companies that they believe the market has undervalued. They believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with the company’s long-term fundamentals. These stocks have been neglected by the market and their price is lower than their “real value”.

The Problem. How do you know what the true value of a stock is? Value investors typically pay extra attention to the fundamentals of the business in order to try to figure out if a stock is being under-valued.

Value Investing Criteria

1. Earnings
2. Earnings growth
3. Cash flow
4. Dividends
5. Book value
6. Industry growth rate

2. What is Growth Stock Investment Strategy?

Growth investors seek out companies that have above average growth, even when the cost of the stock is relatively expensive when valued by metrics such as price-to-book or price-to-earnings ratios. Growth investing is considered the opposite of the stock investment strategy known as value investing.

Profit forecasts and the company’s earnings per share are the primary criteria for a growth investor. Only stocks that are believed to generate high future profits and a strong growth in earnings per share are selected. Growth investors only like stocks with strong earnings growth and large profit growth forecasts, irrespective their valuation.

Examples below:

1. Small Caps
2. Internet and technology stock
3. Emerging markets
4. Recovery shares

3. What is an Income Stock Investment Strategy?

Income investing, which aims to pick companies that provide a steady stream of income, is the most straightforward stock investment strategy. Most investors when they hear “a steady income stream” first think of fixed income securities like bonds. However, stocks can also provide a consistent income stream by paying a dividend.

Which stocks pay dividends?

Income investors most often select from older, more established companies, which are no longer able to achieve high growth rates. These companies are not in industries that are rapidly expanding. These mature companies tend to pay out retained earnings as dividends in order to provide a return n investment to their shareholders instead of reinvesting retained earnings into themselves, which most high growth companies do.

Certain industries, such as utility companies have historically paid a fairly decent dividend.

4. What is a Quality Stock Investment Strategy?

Quality Investing is a stock investment strategy based on identifying stocks with above-average quality characteristics. Quality investors tend to invest only in those High Quality equities that are also attractively priced.

Benjamin Graham in the 1930s classified stocks as either Quality or Low Quality. He also observed that the greatest losses resulted from buying Low Quality at a price that seems fair not from buying Quality at an exorbitant high price.

The BCG matrix of 1970 uses two specific dimensions of life cycle and the experience curve concept, the matrix allocates a company’s products and the company into either Quality classes (Cash Cows and Stars) or Non-Quality classes (Question Marks and Dogs).

Quality Investing became very popular after the burst of the stock market bubble in 2001.

How to identifying Quality Stocks

Systematic Quality investors identify Quality stocks using five categories:

1. Price potential
2. Business model
3. Market environment
4. Management

6. What is the Stock Investment Strategy -Scalping?

Scalping is very short-term trading in which the investor seeks to profit from quick moves in stock prices in a very short period of time, which can be seconds or minutes. Most of these moves occur in the morning hours and before closing. A scalper sits at the computer the whole trading day. 9:30AM (EST) to 4:00 PM (EST).

If you want to be successful scalper. You must employ tight stop losses and have the discipline to get out of a losing trade. For extremely aggressive personalities who have nerves of steal. Most difficult type of trading.

7. What is the Stock Investment Strategy – Daytrading?

Daytraders, by definition do not hold stocks overnight (they sell all of the stocks they buy each day). They hold for short time frames: from several minutes to even several hours. They seek to profit from stock movements that occur during a single trading day. Very strict stop losses must also be employed in order to prevent large losses. A Day Trader gets up usually an hour or so before the market opens and sits at the computer the whole trading day. Day Traders have a long trading day 8-8:30 AM (EST) to 4:00 PM (EST) could be as late as 8:00 PM (EST) if they trade after hours.

A lot of Day Trading is based on market moving news such as retail sales reports, employment data , housing data, company earnings etc…

8. What is the Stock Investment Strategy – Swing Trading?

Swing Traders seek to profit from a stock moving in a desired direction over the course of a few days to even several weeks. This type of trading is well-suited for someone who only as a limited amount of time to research and can’t sit in front of the computer all day long. Swing traders analyze stock charts and look for certain patterns that in the past led to big upswings or downswings based on statistical probability. They then buy or sell short the stock in accordance with the next predicted price swing and make money off the move.

Often wider stop losses (the dollar or percentage amount a trader is willing to loose before selling their investment) are used when Swing Trading. It is much easier to let your winners run while Swing Trading compared to Scalping or Day Trading.

9. What is the Stock Investment Strategy -Buy and Hold?

Long Term-often called Buy and Hold Investing involves buying a stock and holding it for several months or even years. This type of investor usually uses fundamental analysis to make his or her stock selection.

This type of investor looks for undervalued companies; improperly valued companies; buying stocks based on macroeconomic outlooks; and people who don’t want to or can’t monitor their investments daily.

Being a long-term investor involves the least amount of effort and monitoring of investments. You must decide the style of trading that best fits your personality and amount of time you have available.

6. What is the Stock Investment Strategy -CAN SLIM?

Canslim is a growth stock investment strategy formulated from the study of the 500 best performing stock market winners dating back to 1953 in the book How to Make Money in Stocks: A Winning System In Good Times or Bad by William J. O’Neil. This strategy involves technical analysis and fundamental analysis. It is not momentum investing. Canslim identifies companies with strong fundamentals—strong sales and increasing earning and targets buying when the stock breaks out from a base price. Canslim discovers stocks before they make major price advances.

The seven parts of the mnemonic are as follows:

• C = Current earnings. Per share, current earnings should be up to 25%. Accelerating earnings in recent quarters is highly desirable.
• A = Annual earnings, which should be up 25% or more in each of the last three years. Return on equity should be 17% or more.
• N =New product or service, company should have a new product or service that will increase earnings growth.
• S = Supply and demand. Analysis of trading volume of the stock does volume increase or decrease as price increases?
• L = Leader or laggard? Buy “the leading stock in a leading industry”.
• I = Institutional sponsorship, there should be a large percentage of the company owned by mutual funds, banks, insurance companies, pension funds etc.
• M = Market indexes, Buy during uptrends in Dow Jones, S&P 500, and NASDAQ. Three out of four stocks tend to follow the general market pattern.

9. What is the Stock Investment Strategy – Dog of the Dow?

Dogs Of The Dow is an investing strategy formulated in 1972 and is very successful. Each year an investor buys the 10 DJIA (Dow Jones Industrial Average) stocks with the highest dividend yield at the beginning of the year. From 1973 and 1996 Dogs of the Dow returned 20.3% annually, whereas the Dows averaged 15.8%. 1957 to 2003, the Dogs outperformed the Dow by about 3%, with a rate of return of 14.3% annually when the Dow averaged 11%.

10. What is the Stock Investment Strategy of Peter Lynch?

Peter Lynch turned the $20 million Fidelity Magellan in 1977 into the largest mutual fund in the world. Lynch felt individual investors had the advantage over large institutions because the large firms either wouldn’t or couldn’t invest in smaller-cap companies that had yet to experience the explosive that would come once they were discovered by analysts and mutual funds.

1. Only Buy What You Understand

According to Lynch, our greatest stock research tools are our eyes, ears and common sense. Lynch was proud of the fact that many of his great stock ideas were discovered while walking through the grocery store or chatting casually with friends and family.

2. Lynch’s Fundamental Values for stock market :

• Percentage of Sales: Your favorite product or service must comprise a significant part of the companies sales to have an impact on a company’s success.
• PEG Ratio: Buy companies with strong earnings growth and reasonable valuations.
• Favor companies with a strong cash position and below-average debt-to-equity ratios. Strong cash flows and prudent management.

11. What is the Stock Investment Strategy – Piggyback Mutual Funds?

“Go With Where the Elephants Go” The multi-billion dollar funds move stocks and cause them to double or triple. What do these groups need to have a trade/investment qualify to be a stock market pick?

• Earnings Surprises are money managers’ favorite factor. An earnings surprise is when reported earnings beat forecasts Many investors believe that surprises come in bunches. Positive earnings surprise usually come in groups and the stocks tend to continue to rise for many months and vice versa for Negative earnings surprises.
• Analysts Raising Estimates – When an analysts significantly increases their forecasts a stock usually continues up for quite a while and down when they lower earnings forecasts.
• Accelerating Earnings Growth is a huge factor for the big boys to consider a trade to be a stock market pick. If a company which usually has earnings at 15% then has earnings grow to 30%. then earnings has positive momentum. Price-to-book value compares the recent stock price to shareholders’ equity, which is called book value when calculated on a per-share basis. Should be under 15.
• Price-to-cash-flow ratio compares the recent stock price to a company’s per-share operating cash flow. Should be under 35.
• Price-to-earnings-growth ratio compares the P/E ratio to forecast earnings growth. PEG ratios below one signal undervalued stocks and those with PEGs above 2 are overvalued.
• ROE- return on equity measures profitability by comparing the net after-tax income to shareholders equity. Big funds won’t consider a stock maker pick with a ROEs below 15%.

Stock Investment Strategy Information and Tips here

There are countless strategies out there. Some blend the ones above while some are based on astrology. I hope this guide helps you find the ideal stock investment strategy for you. Live long and prosper.

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