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The stock market is an enticing market casino that lures neophytes from all sectors of society to try their luck in it. Many turn wiser and richer, while many lose whatever they have.
Amateurs in the trading sector invest blindly by chasing hot tips, follow the market pundits, or make binary bets.
It is highly recommended to be market savvy and learn the art and science of investing in trading stock markets with grit and gumption.
It isn’t easy to master the skills of stock market investing, but with time and software like Quantopian, one can enhance his odds of success at stock market trading.
5 Types of Stock Trading Strategies
Newcomers enter into the market of stock market trading with one clear intention that is to make a profit on their investment.
If you are passionate about your return on investment, follow one of the below-listed strategies with the pros and cons of each one:
1. Growth Investing
Growth investing is a renowned strategy with the objective of growth of capital for the investor. Under this strategy, organizations or individuals reinvest their profits to attract investors, offering them a dividend.
In exchange for dividends, investors invest more, hoping that profits and the price of the share may increase.
- The first advantage is the appreciation of a large stock price.
- Growth stocks offer the largest price increases.
- Growth stocks show well-defined topping patterns and can be easily sold off (when the price is at its peak) before the price comes down.
- Growth investing means compounding your wealth, offering investors solid returns and unique benefits.
- High volatility could result in a degenerated value of stocks for many companies or people.
- Substantial research is required before investing in a typical category of stock.
- Long term strategy and not suitable for people who want to make immediate profits.
- One can end up making huge losses if he invests in the wrong company.
2. Income Investing
Income investing means investing in a good stock by putting together a collection of an asset like bonds, real estate, stocks, and mutual funds that generate the lowest risk and the maximum annual income.
- Income stocks, also known as defensive stocks, tend to be one of the least volatile stocks.
- So even during recession, inflation, or fluctuation, these stocks are least affected. Examples include food, housing, and beverage stocks.
- These can also generate high-dividend stocks.
- Income stocks can go down, but there is no drastic drop in prices.
- Interest-rate sensitivity means a high rate of interest may result in more people selling their stocks, ultimately leading to a slash in stock prices. This can also hurt the company’s credibility and financial strength.
- If the revenues keep falling, the dividend-paying companies will cut them out.
- The effect of inflation may shrink the value of the dividend income and decrease the value of stocks.
3. Short Selling
Short selling entails the sale of securities that a seller has borrowed to make a short sale. This trading strategy generates profits even in a mitigating stock market.
Under this strategy, the investor can borrow equity shares from a broker, sell them off, and then selling them stock to return. This could be a complex technique and could be difficult for a newbie to follow.
Valuable returns can be obtained from shorting stocks, although it is a bit risky.
- Provide liquidity to the markets which helps in price discovery, lower prices of stocks, and improved bid-ask spreads.
- Ability to reduce the market exposure of a portfolio and hedge an existing portfolio’s long-only exposure.
- Capital proceeds can be used to overweight the portfolio’s long-only component of the portfolio.
- Can lead to reduced volatility by exposure to both long and short positions.
- You get the ability to derive risk-adjusted returns.
- Shorting stocks can be inherently volatile.
- There is no limit to the potential losses.
- Borrowed stock can be recalled by the broker, especially in case he has low control on the price to safeguard his position.
- Short squeezes can push prices against short-sellers.
- Borrowing stock can be difficult in fewer liquidity conditions, and less liquid stocks can be expensive to borrow.
- Low understanding regarding short selling.
4. Value Investing
Value investing is a strategy where stocks appear to be traded for less than their actual or intrinsic value. Value investing is simple to use and easy to understand.
Simple shares are held by investors till the price rises. It is a profitable scenario when the volatility in the stock market is low.
- High return on investment.
- Stocks can be bought when they are under-priced and sold when the market price increases.
- This kind of strategy ensures a low-risk rate and higher returns.
- The power of compounding exists in this strategy. Further profits can be made if the returns and dividends earned are reinvested. Thus the interest earned on interest can be quite profitable.
- Reliable blue-chip investments involved wherein the potential of the company is assessed, which can eventually generate high earnings.
- It is difficult to identify the intrinsic value of shares, and this requires expertise which not every rookie possesses.
- The investor must keep a lot of patience as value investing is not mean for everyone. It is not for people who are looking for short term gains. This is more of a long term investment.
- It could turn into a no-win situation where investors keep investors for a lifetime, and the value doesn’t change. It is a dead stock or equal value sock for them.
- Value investing means going against the flow wherein there could be a long waiting time to yield returns. It requires a lot of self-confidence and patience to bear these stocks.
- Poor diversification.
5. Trend Following
This is another important trading strategy that follows the trend. In this case, the market price is not followed; instead, an emerging trend is diligently followed.
There are many statistical and mathematical calculations involved in determining the stock moves, trade signals, market prices, channel breakouts, and moving averages.
- The investor can follow the trend from the beginning and can be followed for a long time till the trend exists.
- Exact entries and exits are not required.
- Least time consuming with low transaction costs.
- There could be false breakouts, and no trend gains traction.
- Low hit rate as even the most professional and experienced investors get a hit rate of 8 out of 10.
- As an investor, one must not let go of a positive venture or a good trend, and he must be vigilant in keeping a tap on the trends. One miss could be expensive for them.
There are strategies that a new investor can try to make profits in the market trading system like the gap strategy, quality investing, flag pattern, etc.
Only investment does not matter, but a newbie must be efficient in addressing position and risk management. Stringent analysis on stocks is possible with technological advancements like free stock api.
The ultimate goal is to make profits out of the investments made in the stock market, and a rookie should be well aware of the rules regulations, norms, and policies to become a pro in this field.
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