Tips to Choose a Winning Investment Strategy

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Tips to Choose a Winning Investment Strategy

Buying stocks is not very difficult. However, the challenging part is choosing companies that manage to stay on top of the stock markets. This is where most investors seek stock market tips in India. So, what tried-and-true strategies can you use for investing in stock markets? While there are plenty of investment plans, remember to choose the most flexible one. This way, you can customize the approaches if they don’t suit your risk tolerance or schedule. Here are some common investment strategies you can consider. 

 Value Investing

This form of investing is made popular by Warren Buffet and works on a simple principle: buy stocks that are undervalued. Aim for stocks that do not fully reflect the intrinsic value of the security. However, finding under-priced stocks may require extensive research on the fundamentals of the companies. 
This approach works with an idea that stock markets contain some degree of irrationality. It is this irrationality that enables you to purchase stocks at a lesser price. But with value investing, it is vital to remain in the game for a longer time. 
You need to be a patient investor and consider the buy and hold technique for your investment. However, exceptions are always possible. Professional stock market tips in India can help you make the right calls and earn handsome payoffs in a shorter time interval. 

Tools for Value Investing

The P/E or price-earnings ratio is a handy tool for identifying undervalued stocks quickly. The number derived is a result of dividing a stock’s share price by its earnings per share. As a value investor, you are advised to find companies that have a low P/E ratio. But can the P/E ratio solely determine accurate stocks? While the P/E ratio is a good start, it cannot substitute strategies that use a comprehensive approach for picking cheap stocks. Combine quantitative methods like quality, momentum, formulaic value, and profitability measures to avoid value traps in P/E ratios. 

Growth Investing

As a technique focusing on capital appreciation, growth investing focuses on companies that display above-the-average growth. The growth rate is measured through profits and revenues. Here, the share price may appear to be expensive with reference to matrices like price-to-book ratios and P/E ratio. This strategy is relatively risky and requires you to invest in blue chips, small companies with tremendous growth potential, or in emerging markets. 

Variables In Growth Investing

Growth investing does not come with standard metrics for guidance. However, there are a few factors you can consider. For instance, it is found that growth stocks often thrive when interest rates fall. But remember that growth stocks are the first to get impacted with a downturn in the economy. You will also need to consider the efficacy of the company’s management. After all, achieving outstanding growth is one of the most challenging aspects of a company’s executive team. 
A stellar leadership must be present to guide the team on brilliant performance and growth achievement. Growth accompanied by massive borrowing is certainly of little help. It is essential to watch out for the competition as well. If the company’s primary product is easily replicable, then the prospect of long-term growth is dim. 

Small-Cap Investing

This strategy is recommended for those investors who are willing to add some extra risk to their portfolio. Here, stocks from companies with smaller market capitalization are at play. These stocks often go unnoticed and hence are attractive to investors. Large-cap stocks, on the other hand, come with inflated values that grab everyone’s attention. Small-cap stocks are deemed to be appealing since they place restrictions on institutional investors. However, small-cap is recommended only for experienced investors since the stocks move in volatile market conditions. 

Momentum Investing

Momentum investing works on the belief that winners never lose, and losers can never rise. Investors in this frame of mindset look for stocks that are experiencing an uptrend. They may even short-sell the securities because of the losers keep losing attitude. However, this is a risky practice. Here, investors consider a data-driven approach to identify patterns in stock prices. These patterns are used as guides for purchasing decisions. 

Does It Always Work?

There is no single answer considering all the other investing styles. While momentum trading is known to impact exceptional value to asset classes theoretically, the strategy often underperforms in the real-world due to trading costs. Thanks to plenty of buying and selling actions, you may have to shell out high commission and brokerage fees. 
Momentum strategy needs you to be always ready to buy or sell at any point in time. The profits in this strategy build over months and not years. This is in stark contrast to the buy-and-hold technique that adopts a set-it-and-forget approach. Simply put, this strategy is not for someone disinterested in staying abreast of the market fluctuations. 
Take some time to understand the characteristics of each investment type. This will equip you with the right strategy for making long-term investments and spare you from incurring high costs of changing course in between.