Basic stock trading methods and strategies
The right-minded and principled stock trading methods and strategies will allow the investors and traders to grab the best of every opportunity that exists in the stock market. With the righteous application of stock trading strategies, any average trade can become highly profitable.
Stocks are pretty volatile in nature. Sometimes, they account to downtrends or uptrends, but most of the time, they move sideways. A strategy or method of trading will help you make ample profits. It does not matter if you are an active trader, swing trade or positional trader, you must have a trading strategy to rely and base your trade on.
Let us look at some most basic and easy to implement stock trading strategies and methods.
Income Investing
The income investing strategy is centred around investing in stocks to build a portfolio which supports a regular income for the trader or investor. The core concept of income investing is to make up for a consistent and stable income. The income can be in terms of interests, rents, dividends, etc.
Pros:
1. The income investing helps the traders or investors add on to their fixed income. With income investing stocks, the traders can easily supplement the fixed income.
2. In the long term, income investing garners the prospective of capital gain and growth. This potential growth of capital could make for high earnings in the future.
Cons:
1. Income investing is not suitable for short term investing. It will garner significantly less income if pursued for a short time period, and can even account for high risks. The companies that indulge in income investing will use most of their profits to distribute dividends among shareholders instead of using it for the growth of the business.
2. There are some risks of inflation associated with income investing. As inflation emerges, the values of bonds, funds, and income stock diminished very extremely.
Growth Investing
Growth investing strategy involves buying stocks of companies and businesses that are on a better growth rate than the other companies in their industries. Growth investors tend to focus on small start-ups and young blood companies that have hopes of becoming very fruitful in the coming years. Such companies, most of the time, have a distinct USP that makes them beneficial than other companies in their industries.
Pros:
1. Growth investing accounts for the utter diversification of a portfolio. It also mitigates risks for the entire portfolio.
2. Growth investing offers the most tax-efficient investment opportunities.
3. Growth investing focuses on companies that have massive potential for success and growth. This way, it leads to high returns in the long run.
Cons:
1. A lot of extensive research is required to find the best out of the lot. One has to look and analyse a lot of factors before investing considerable sums in a young company.
2. Growth investing involves high volatility. You are investing in small and developing companies. There are increased risks of uncertainties.
3.Growth investing works on profits only in the long term. In the short term, it won't lead to fair profits.
Value investing
In value investing strategy, one invests in stocks and companies that have an underlying high value but are underestimated in the market. Investors look out for such intrinsic valued companies and go with them. Value investors ponder that the market always overreacts to both bad and good announcements. Therefore, such announcements lead to the movements of stocks and companies that do not stand in the long term. This overreaction of the market to news announcements give traders and investors an opportunity to buy stocks at a discounted price in the market.
Pros:
1. Value investing, when formulated correctly, can lead to massive gains. The reason is that you are already investing in a high-value company, but the price you are paying is low. So at lowest investments, you get to maximise your profits.
2. Value investing squeeze out the best from the approach of compounding. Your investments are bound to increase on extremities if you keep on investing back into the value companies.
Cons:
1. It is quite a challenge to recognise and depict the righteous companies for value investing. One needs to acquire the required expertise to analyse the value of principled companies.
2. Value investing requires a lot of patience. People who want quick profits may find it challenging to pursue and wait with the value of investing.
3. With value investing, you are actually investing against the crowd. That requires a whole of self-confidence.
Momentum investing
Momentum investing in stock trading involves making profits and gains from the existing market movement and trends. Momentum investing focuses on trends that can hold up and stay for a long time in the market. The prodigy is acknowledged by staying and continuing with such trends till they last.
Pros:
1. Momentum investing accounts for high profits in the short run.
2. Momentum investing helps in reaping benefits from the volatility of the market. It is all about looking and searching for stocks that will heave up the prices and selling them before the price falls.
3. Instead of flowing with your emotions in trading and making rash decisions, here the traders and investors take advantage of their competitor's emotions, which results in the changing prices.
Cons:
1. Momentum investing may lead to high turnover fees. It is seen to be one of the major drawbacks for most of the momentum investors and traders.
2. Since momentum investments require the traders and investors to monitor the trade till it lasts closely, it takes up so much of time.
3. Momentum investing is sensitive to market conditions. It works fair in the bull market but not that good in a bear market.
Short selling
Short selling refers to the sale of instruments or stocks that the stockholders borrow from the market and sells them, hoping that the prices will decline and he or she will repurchase those shares at a lower price. This type of stock trading strategy works best in declining stock markets.
Pros:
1. Short selling offers immense opportunities and possibilities to make huge profits.
2. Very less initial capital is required to pursue short selling.
3. Leveraging the stocks is very easy with short selling.
Cons:
1. Like high profits, there is potential for high losses too.
2. To pursue short selling, one must have a margin account.
3. A considerable amount of margin interest is charged in short selling.
Quality Investing
Quality investing as a stock trading strategy focuses on the fundamental analysis of companies to determine the qualities and characteristics of companies. Companies with high-quality standards are then pursued after the research.
Pros:
1. With quality investing, there are very negligible chances of any stern or permanent loss.
2. In the long term, the company is meant to reap you massive profits.
Cons:
1. A lot of time and effort is required to analyse the quality stands of different companies.
2. These stocks are mostly high priced. So it becomes difficult for small and new traders to pursue quality investing.
Conclusion
All the stock trading methods and strategies methods mentioned above are the most basic and popular one that is used by many traders in the market. One can also use a mix of such strategies in the trading arena. In the end, it all depends on a trader's financial goals and plans and what method is best suited.
If you are inquiring for an online broker to facilitate any stock trading strategy, we would recommend ROinvesting. ROinvesting is a regulated broker functioning in Italy, Norway, Denmark, Sweden, Spain. ROinvesting deals in a wide range of instruments like stocks, indices, forex, ETFs, commodities, metals, and more.
