Stock investing strategy guide (full sample)
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Find out how putting money into various types of stocks can help you meet your investment and financial goals. This article explores how investors can use different types of investing to build wealth and make the most of their money. It includes information on the benefits, drawbacks, returns, and other aspects of investing in stocks. It covers growth investing, value investing, and income investing.
Areas of expertise
Different types of stock investing strategies
Growth stock investments
Growth investing is an approach in which you invest in companies that you believe will grow significantly. This means that the expected future performance (together with the share price) of the business will outpace the market. Growth investing is one of the riskiest types of stock investing as it is more prone to emotion and investor sentiment about a business.
Why would growth stock investing be right for you?
Growth stock will let you invest in:
New businesses that are coming into the market for the first time (via an initial public offering, or IPO).
Companies that are experiencing rapid growth due to innovations, new products, or services.
Companies that aren't necessarily leaders in their sectors or industries.
Questionable financial health - growth businesses often use debt to finance their expansion.
Growth businesses do not often pay dividends as they reinvest profits into growth.
Potentially excellent prospects.
What are the most important fundamental factors for growth investing?
These types of companies tend to meet the following criteria:
Price/Earnings (P/E) ratio - The price/earnings ratio of growth businesses tends to be fairly high, compared to their industry or sector.
Debt and equity - Growth businesses often have high debt.
Price/Earnings Growth (PEG) - Aim for a PEG that is much better than average for the industry or sector.
Earnings growth rate - You are looking for market-beating growth rates, ahead of competitors.
Return on Equity (ROE) - Return on equity might be lower than expected as more of a company's profits are reinvested for future growth.
What are some examples of growth stocks?
Growth stocks can change rapidly, but companies that have seen substantial growth in recent years include Facebook, Tesla, and Netflix. Growth stocks are often found in the tech sector.
When should you sell this type of investment?
Growth stocks are influenced more by emotion and sentiment than other types of stock. As you're not likely to be receiving an interim return via dividends, think carefully about when you want to sell the stock based on increases in the share price. Growth stocks can gain (and lose) value quickly, and you might want to lock in those gains by selling the stock once it reaches a target price.
What are your expected returns?
Growth stocks are among the most unpredictable investments. Share prices can be extremely volatile, so you'll want to keep a close eye on your stocks to lock in gains.
Growth stocks can be overvalued; they are a favorite of pundits and news channels looking for the "next big thing," so the hype level can be high.
The money you make from growth stocks will be mainly realized through gains in the share price rather than dividends. This means that you'll tend to get the best return on these stocks when you sell them.
What are the drawbacks of growth investing?
Ruled by emotion and sentiment - Growth stocks are the type of stocks that regularly make financial news for large gains and losses. They fall into and out of favor with investors are prone to being popular and then dropped quickly.
Difficult to separate fact from hype - Looking at a growth stock objectively can be difficult.
The stock price on newly launched (IPO) stocks can take a while to normalize and will often fall in value in the few months following an IPO as the euphoria fades and financial realities set in.
Remember that you should diversify your growth investing by putting money into various stocks across different industries and diversifying your portfolio with other styles of investment.
Growth stocks can be extremely volatile on a day-to-day, week-to-week, and month-to-month basis.
Value stock investments
Find out how putting money into value stocks can help you meet your investment and financial goals. This article explores how investors can use value investing to build wealth and make the most of their money. It includes information on the benefits, drawbacks, returns, and other aspects of investing in value stocks.
Value investing is an approach that invests in unloved, undervalued businesses in the hope of making a good capital return. It tends to require more research to uncover stocks that other investors might have overlooked.
Why would value stock investing be right for you?
Value stock will let you invest in:
Businesses that are undervalued or overlooked by other investors and the market.
Companies that aren't necessarily leaders in their sectors or industries.
Reasonable financial health.
Undervalued businesses may or may not pay dividends.
Growth may be depressed or underwhelming in the short to medium term.
Good prospects.
What are the most important fundamental factors for value investing?
These types of companies tend to meet the following criteria:
Market cap - You don't tend to find many value stocks among the biggest companies; those businesses are generally well understood, with a share price to match.
Price / Earnings (P/E) ratio - The price/earnings ratio of value businesses tends to be low; they can be slow-growing, but make money over time. Remember to compare P/E within industries and sectors, as this ratio is very sensitive to the field the business operates in.
Debt and equity - You'll want to invest in value businesses that don't have enormous amounts of debt financing their growth; large debt means high interest payments, which reduces the potential value of the business.
Price / Earnings Growth (PEG) - Aim for a PEG that is better than average for the industry or sector.
Return on Investment (ROI) - Look for a return on investment that's ahead of the industry or sector average.
When should you sell this type of investment?
Like most other investments, it's best to hold value stocks for extended periods if you want to see the best returns. It's also worth comparing value stocks against their peers on a regular basis. As the markets shift, bargains can appear, so you might want to review for value stocks on a quarterly or annual basis.
What are your expected returns?
Value stocks are among the more unpredictable investments. These stocks might have low share prices for a reason, so do your research carefully.
The money you make from value stocks will be mainly realized through gains in the share price, rather than dividends. This means that you'll tend to get the best return on these stocks when you sell them.
What are the drawbacks of value investing?
Value investing is inherently riskier than other types of investing, as it assumes that you know something about a company's value that others don't.
Remember that you should diversify your value investing by putting money into various stocks across different industries and diversifying your portfolio with other styles of investment.
Income stock investments
Find out how putting money into income stocks can help you meet your investment and financial goals. This article explores how investors can use income investing to build wealth and make the most of their money. It includes information on the benefits, drawbacks, returns, and other aspects of investing in income stocks.
Income investing is an investment approach that puts your money into businesses that pay a reliable, above-average dividend. It focuses more on the interim returns (dividends) that you get through the life of your investment, rather than capital growth in the share price.
Why would income stock investing be right for me?
Income stock will let you invest in:
Businesses with a good profit margin that pay higher-than-average dividends.
Robust financial health with good revenues and earnings.
A proven history and safe prospects.
What are the most important fundamental factors for income investing?
These types of companies tend to meet the following criteria:
Revenue - A healthy income; good dividend payers tend to have healthy, reliable revenues.
Market cap - Income stocks can be large, mid or small cap; it's the dividend yield that matters more than the overall size of the company.
Earnings and growth - Good profitability with reliable or slightly above-average year-on-year growth.
Dividend yield - A higher-than-average dividend yield; you're aiming for a minimum of 3-3.5%.
Earnings Per Share (EPS) - Ahead of or level with their competitors.
Return on Investment (ROI) - Ahead of their competitors.
What are some examples of income stocks?
High dividend-paying stocks include AT&T, Chevron, GlaxoSmithKline, Rio Tinto, Duke Energy, and Las Vegas Sands.
When should you sell this type of investment?
The purpose of income stocks is to provide you with a reliable cash flow via dividend payments, year after year. Unless you have a pressing need to sell these stocks, you can keep investments in income shares indefinitely and enjoy the income from the dividends.
What are your expected returns?
Stocks vary significantly in performance, depending on the company, industry, sector, and other market values.
Investments in income stocks are meant to produce dividend returns ahead of the market average.
Because you're likely to hold these stocks for an extended period, most of your realized income will be from dividend payments rather than capital gains.
What are the drawbacks of quality investing?
You should not invest in these types of businesses over the short or medium term as it is possible you will lose money.
Remember that you should diversify your investments by putting money into various stocks across different industries and diversifying your portfolio with other styles of investment.
Like any stock market investment, income stocks can be volatile on a day-to-day, week-to-week, and month-to-month basis.
How do you invest in growth, value, or income stocks?
You can easily invest directly into various types of stock through your online broker account.
Content originally written by Paul Maplesden, a freelance writer, and edited by me.
