Breaking Down the Most Popular Stock Investing Techniques of All Times
For beginners, starting their journey in the stock market could be an overwhelming and daunting adventure due to the complex nature of this environment and the vast amount of information available nowadays on the internet.
One thing is true in the markets: there are many ways to lose money but only a handful of ways to earn it. This is why the most disciplined investors who stick to a time-tested system are those that have the higher odds to generate positive results.
If you just installed a trading app to dive into the investing world, the following article breaks down the most popular (and successful) methodologies employed by both laymen and professionals to make money in the stock market.
Value investing became popular in 1934 with the release of Benjamin Graham’s book “Security Analysis” which instructed both professionals and beginners about the intricacies of analyzing and valuing businesses.
Graham’s teachings later evolved to incorporate other variables into the discipline of business valuation including qualitative factors such as the strength of a company’s business model. In addition, the concept of margin of safety was introduced, allowing investors some margin of error when dealing with stocks.
The value investing methodology consists of finding stocks that are trading below their “fair” or “intrinsic” value as calculated by the investor by using the tools provided by fundamental analysis.
Indexes are made up of a basket of securities and, in the beginning, their purpose was to portray how a certain asset class was performing as a whole. However, with the rise of financial engineering, various firms started to introduce the concept of index investing by creating vehicles that tracked the performance of these benchmarks.
Some of the most popular indexes are equity-only benchmarks such as the Dow Jones Industrial Average and the S&P 500 index. These have been used to create mutual funds and exchange-traded funds (ETFs) whose goal is to mirror their performance.
However, index investing is now available for multiple other asset classes including fixed-income securities (bonds, preferred stocks, etc.) and real estate investment trusts (REITs).
One of the benefits of index investing is that diversification is guaranteed. In addition, a portfolio made up of index ETFs and mutual funds can be easily built without having to do much research as the portfolio managers of the funds do all the heavy lifting to keep the performance of their vehicles in line with that of the benchmark it tracks.
Dollar-Cost Averaging (DCA)
Timing the market is one of the most difficult tasks in the investment field and many of the brightest minds in the world have attempted and failed to accurately predict what the market will do next.
To avoid putting too much thought into what direction things will take in the next few weeks, months, or even years, investors can adopt what is considered a time-tested discipline called dollar-cost averaging (DCA).
This technique consists of adding the same amount of money to a given portfolio periodically to capture both the ups and the downs of the market so the cost basis of the assets that make up the investment account can be smoothed out.
For example, if an investor has $5,000 to deploy, he can opt to buy $1,000 worth of securities every month within the next 5 months instead of pouring everything at once.
Tactical investing involves the use of macro and industry analysis to identify the hottest sectors in the market. This methodology is highly dependent on the economic cycle, changes in macroeconomic conditions such as interest rates and inflation, and capital inflows and outflows.
In addition, geographical analysis may also be used to identify latitudes that are attracting significant amounts of capital from investors. The reason for this is that the higher the volume of inflows toward those regions is, the higher the valuation of the assets within those areas will be.
Tactical investors tend to stay up to date with the latest news, read research reports about different industries, and regularly attend trade shows and conferences so they can catch the current trends that are attracting the interest of other investors so they can get in early and get out before they pass.