Choosing the right strategy and investment style allows investors to manage their capital wisely and achieve measurable profits. Depending on your knowledge and risk tolerance, you can choose the most advantageous one for you and build your investment portfolio on this basis.
What are stock market investment strategies?
An investment strategy is a specific way of acting that allows you to make financial decisions that are to bring the investor closer to achieving the set goal, profit, etc. There are many ways to approach this topic, and here are a few:
- BUY AND HOLD
This is a long-term type of strategy in which an investor buys shares both during a bull market (an increase in the share prices of various industries) and a bear market (a continuing decline in market prices). This method works best when choosing stable and well-established companies. This will reduce your transaction costs and give you a good chance of making satisfactory profits from this investment. However, you need to keep in mind the volatility of business cycles, which will have a strong impact on stock prices. During a recession, you can succumb to strong emotions and, fearing a loss, make ill-considered financial decisions. To slightly minimize the negative effects of declines, aim for diversification – buy shares from different economic sectors, geographical areas, decide to buy other, slightly more stable assets (bonds, investment metals).
- SPECULATION
It focuses on a quick but also small profit. Traders using this strategy execute a lot of trades and then sell them in a short period of time. It takes advantage of dynamic changes in the market, trends, historical data and takes action based on this. Active investing also includes swing trading and spread trading strategies.
Swing trading is about observing trends on the stock market and buying shares, holding its position for more than 1 day, but also not exceeding a few weeks. To assess a given situation, investors should observe macroeconomic indicators and perform fundamental analysis to predict possible events.
Spread trading, on the other hand, involves buying one financial instrument and selling another at the same time. It is often used for precious metals such as gold and silver. In order to make money on a spread transaction, it is worth buying stronger instruments and selling weaker ones, and thus profit from price differences. Another way can also be the so-called crack spread, which involves simultaneous trading of crude oil futures and oil-based products (e.g. gasoline). In this case, you also make money on the price differences of individual transactions.
- INVESTING FOR GROWTH
It is based on investments in shares of companies entering the stock exchange with high growth potential. These are mostly companies, start-ups from the technology industry (but not only) offering a new, innovative product or solution on the market. Despite the fact that such companies do not yet have a stable position on the market, it is often predicted that they have increased opportunities for dynamic development. It is also associated with an attractive vision of high profits in the future, which is tempting for many investors.
- CALCULATION OF MARKET CAPITALIZATION
To estimate the value of a company’s shares, you can calculate its market capitalization by multiplying its number of shares by the market price of each share. After receiving the result of the capitalization, it should be classified into a specific category. These categories are:
Micro capitalization – the value of capitalization from 50 to 300 million USD, the shares of such companies are risky, as they are usually new companies that may be the most susceptible to stock market declines;
Small capitalization – capitalization value from USD 300 million to USD 2 billion, these are relatively young and dynamically developing companies, they achieve success on the market and good financial results;
Mid-cap – a capitalization value of $2 billion to $10 billion, well-established companies that are slightly more likely to grow than a large cap;
Large capitalization – the value of capitalization between USD 10 billion, applies to stable entities, but at the same time somewhat limited opportunities for further growth, which is reflected in a lower rate of return on investment.
Estimating the total value of a company’s shares is a strategy to determine the potential profits to be made.
- QUALITY INVESTING
A strategy that focuses on companies that are characterized by an effective management method, a unique business model, high-quality products or strong brand capital, high profits, a favorable financial situation or stable cash flow. In particular, it is worth paying attention to the latter factor, because it informs about what resources the company can freely dispose of. For investors, this means a guarantee of return on their investments.
Styles of investing in the stock market
Behavioral economics argues that stock market investing styles prove that people make financial decisions based on emotions rather than rational thinking. Not, as was thought much earlier, only a rational analysis of the environment. This knowledge allows you to get to know and understand investor behavior better and, as a result, make better choices. Therefore, the topic of risk aversion is closely related to specific attitudes and investment styles that can be observed on the capital market.
- Conservative style
It applies to investors who avoid risk and therefore prefer to even choose to make smaller profits. Their portfolio will largely consist of safe, stable financial instruments, e.g. bonds, investment funds.
- Sustainable style
They accept risk in a moderate way, their portfolio consists of safe and risky investment instruments, e.g. treasury bonds and shares.
- Aggressive style
These are investors who are looking for opportunities, often very risky. They expect high returns on their investments. For example, it can take advantage of a specific macroeconomic situation in the world, a crisis, a war. Often then there is a depreciation of the currency of a given country by its mass purchase and sale by a speculator.
How to invest in the stock market?
Despite many different strategies and investment styles, it is possible to distinguish universal tips that will allow for a rational approach to actions on the stock exchange.
First of all, have control over the investments you make. It is best to write down the individual instruments you buy. This will make it easier for you to assess your current resources and capabilities.
Knowing your investment strategies and choosing a rational investment style is critical to making a profit. It is worth testing each of the strategies and see which one we feel best in and thanks to which you achieve the greatest success.
