Investing without a stock investment strategy is like searching for a treasure without a map. The correct stock investment strategy should not only define your
investment methods, but will allow you to achieve your financial goals within your specified timeframe.
Four factors that determine your stock investment strategy
To determine your stock investment strategy you first will need to know the following:
- Goals - The total amount of money you will need to accomplish your goals.
- Timeframe - The length of time until you need to achieve your goals.
- Risk level - How much risk you are willing to take to achieve your goals.
- Return level - What returns you are you expecting to achieve on your investments.
If you don't know what your financial goals are take a moment right now to write out where you want to be
financially in the future. You may want to retire early, pay for college or just live more comfortably.
Make sure to attach a dollar amount that indicates how much you need for that goal along with a timeframe you would like to achieve that goal. We all have important goals in our lives that we need to take into consideration when we create a stock investment strategy.
The amount of time that is available to achieve any goal is very important. Simply put if you don't have enough time to achieve
your goal based on your current return then you will need to adjust your return, decrease your goal or make your
timeframe longer. Having a shorter timeframe can put you into a different stock investment strategy than what you were initially thinking.
Certain goals can be very aggressive for a specific timeframe and that can lead to your risk level being higher than what you would like, but have to have in order to
achieve those goals. There is a correlation to risk vs reward in investing and making sure that the higher risk can result in a reward high enough to justify a temporary setback with a losing stock investment.
The return level that is needed to achieve your goals based on your timeframe might not always be what your
expecting. If your timeframe is shorter than what you would like to achieve your goal then your returns will have
to compensate for the shortcoming. This can sometimes result is a higher risk level than one might be used to.
We have a great online calculator that you can access here investment tools
that will help you understand the relationship between your goals, timeframe and returns that are required to
reach your goals.
Four questions that will narrow down your stock investment strategy search.
Before anyone can start looking at the different stock investment strategies that are available you should first
know the answers to a couple simple questions.
1) How interested are you in becoming more active in stock investing? If you are not interested in
becoming more active in stock investing then a simpler, more hands off approach, would be
recommended. One of the most simple and effective hands off methods of stock investing would be to invest in the S&P
500 Index and putting a set amount towards stock investing each month. On the other hand, if you want to actively manage
your stock investing and pursue higher returns then there are many stock investment strategies that can be selected to best fit your
interest level.
2) How much time do you have to manage your stock investments? Certain stock investment strategies require more time
than others. Good stock investment strategy shouldn't take more than a few hours per month to implement. If you
subscribe to an stock investment service you can lower that time down because they do the most time consuming part of
the process the up front research. You can find a good stock investment strategy that can accomplish your goals and
within your time that you can devote to managing your stock investments is the key.
3) Are you investing for income or for growth in stock value? In general, you can classify stocks as income
stocks or growth stocks. Income stocks produce a dividend during a specific time period such as every quarter,
which provides income on a consistent basis. Growth stocks might produce a dividend, but are mainly purchased for
growth in stock price.
4) Are you going to invest in individual stocks or some type of fund? Selecting individual stocks will take
a more time than just selecting a mutual fund or an index, but your efforts can be rewarded with greater returns.
When you purchase a mutual fund or an index you are purchasing a large baskets of stocks that have been
pre-selected for you. It does make it easier to diversify, but there is a downside to this theory. There might
be stocks that are going through a down period, which will reduce your overall return.
Two basic methods of analyzing stocks
Now that we've touched on a few important questions to ask yourself we can get started with more details about the
different stock investment strategies. Stock investment strategies can be split into two main methods: fundamental
analysis and technical analysis.
Fundamental analysis is that the stock market can incorrectly price stocks, but eventually the correct price will be
obtained through time. The focus is in finding these undervalued companies and purchase them. In turn, they sell
the stock when the stock is fully-valued or even over-valued.
Technical analysis rely on charts and indicators that revolve around price and time such as moving averages,
volume and relative strength of stocks just to name a few. There are way too many stock indicators to name them
all here.
Each type of stock investment strategy analysis has it's advantages and disadvantages. There is no clear winner as to which method is the
best. It boils down to your own belief more than the system. It's about what you feel is a valid reason to buy a
stock. If you don't believe that a low PE ratio is a strong enough reason to buy a stock then you should not be
using that type of system.
Next step: List of stock investment strategies
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