Hence, here are the fundamental approaches to investing. It's important to note that because each approach has its strengths and weaknesses, investors should apply all of these approaches to build a well-rounded portfolio.
Also, most of these methods focus on buying/longing stocks, not selling/shorting them, because as mentioned, investment is long-term due to the stock market's tendency to always go upwards.
Growth investing
Growth investors look for stock that have the potential to grow at a rate significantly higher than other stocks in their industry. Most of the time, such stocks are relatively cheap as the market capitalization of the company is usually quite small.
These stocks are usually found in rapidly growing industries(like the cannabis industry when it was legalized), which growth investors buy, hold and sell for a profit in several years time.
Growth investing also has its risks, as all investing does. Because 'growth stocks' are usually from companies which are relatively small or new, there is not much data about the quality or reliability of the company. This means that most of these companies could go bankrupt at any time, so you will have to make sure you do a thorough analysis of the company's fundamentals(you should be doing this for all the stocks you purchase)
Value investing
Value investors on the other hand look for stocks which are undervalued(cheaper than expected). They first calculate the true value of a stock. Then, they check the actual stock market prices and make a comparison, seeing whether the stock is undervalued or overvalued.
Value investors then make the decision to buy stocks which they feel are undervalued or discounted, hoping that the stock will increase in price and earn them profit. Value investing works because of the fluctuation of stock market prices. When prices are low, value investors can swoop in and grab the stock and hold it until it bounces back up.
The downside of value investing is that it can be quite subjective, one value investor could think that the stock is undervalued but one could think that it's overvalued. Value investors also have to do extremely in depth research about the company, having to know their numbers like the back of their hand.
Income investing
Finally, we have my favorite form of investing. Income investing works exactly as the name suggests. Income investors buy stocks which generate income for them. The stocks do this when they pay out dividends to their shareholders.
Income investors usually invest in bigger, more reputable companies like blue-chip stocks. They look for companies which pay out dividends consistently and look for stocks with a high dividend yield and strong fundamentals. Income investors look for stocks with the lowest risk out of all the three types of investors, and usually do not ever sell their stocks until retirement(some may not even sell at all!), collecting dividends every year.
Final thoughts
All three of these approaches are effective ways to make money investing in the stock market. Investors must learn to be patient and headstrong. The approach which you choose depends on your age(the younger you are, the more risk you can take), income level and risk tolerance. Growth investing has the highest amount of risk, followed by value and then income.
If you feel that I have missed out something, please do let me know, drop me an email at 'jingrui.wu.2002@gmail.com' and I will be sure to reply ASAP.
Also, if you enjoyed this article, feel free to check out my other articles and continue to follow me on my journey to become a millionaire by 29!
P.S. Read part 3 of 'A Beginner's Guide to Stock Market Investing' here!
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