You are probably excited for the day you open a brokerage account and invest in some stocks. But, have you planned out what type of strategy to use? Investing strategies are strategies that lead towards an investor’s goals depending on what they want to achieve. Perhaps you might want high capital appreciation, or have low risk tolerance.
The four main investing strategies are value investing, growth investing, momentum investing, and dollar-cost averaging.
Value Investing:
Value investing is where you pick stocks that seem undervalued, or being traded for less than their book value. When the stock market reacts to good and bad news, for example, a pandemic, this reaction allows investors to buy stocks at a low price and wait until their prices rise in the future to sell. This strategy is best for long-term, as it requires the investors to have patience and wait.
Some of the most famous value investors include Benjamin Graham, Warren Buffett, and Charlie Munger. Benjamin Graham is especially renowned for being “the father of value investing” and has written The Intelligent Investor, a book regarded as essential to read for any beginner investor. Warren Buffett is also known for being one of Graham’s students and earning most of his wealth from value investing. Charlie Munger, the vice chairman of Berkshire Hathaway which is controlled by Buffett, is also a value investor. All three men have written many books about investing which are very useful.
Growth Investing:
Growth investing is another investing strategy used by investors. Investors focus on companies predicting to have above-average growth. In value investing, low-cost deals are the way to go. Growth investing focuses on capital appreciation, or the increase of value in assets. Some factors to look for in growth investing include profit margins, historical and future earnings growth, returns on equity, and share price performance.
Famous investors include Thomas Rowe Price, Jr. Price is known as the “father of growth investing.” He founded T. Rowe Price Group, Inc., an investment management firm.
Momentum Investing:
Momentum investing happens when investors buy stocks that are rising in price, then sell them after they start losing momentum. Investors do this process over and over, to get their best gains. Some risks of momentum investing is not knowing when should you buy, when should you sell, and moving too early.
Richard Driehaus is regarded as the “father of momentum investing.” He is a fund manager and the founder of Driehaus Capital Management LLC, a stock brokerage firm.
Dollar-Cost Averaging (DCA):
Dollar-cost averaging is when an investor invests a fixed sum towards a target asset periodically to reduce risk in buying the asset overall. It is also known as the constant dollar plan.
Some examples of DCA are 401(k) plans, mutual funds, index funds, and ETFs. The point of DCA in all these examples is to reduce market volatility as prices will vary during different periods of time, and buying an asset in one go during the wrong time can seriously harm an investor.
What You Can Do:
Everyone needs different strategies, and you are no exception. Find out which strategy best fits for you, because it will make your investing life easier. Have fun investing, Teen Trillionaire!
Written by Allie Chang