Given the complex rules and regulations surrounding modern investing and the multitude of investment options available, you may be wondering how to become an investor while successfully avoiding potential pitfalls. From a beginner’s perspective, trying to learn all about stock market strategies can feel particularly overwhelming. With so much information available online, it can be challenging to discern stock market strategies that work from the ones that can land you in hot water fast. This can make learning the best stock market strategies seem like a daunting task for new investors.

Fortunately, this couldn’t be further from the truth. With the right information and resources, you can be on your way to increasing your profits and becoming a successful investor.

What are Stock Market Strategies

Stock market strategies help guide a trader’s investment decisions based on future needs for capital, goals, and risk tolerance. Some stock market strategies seek quick growth with investors focusing on capital appreciation while other strategies follow a lower-risk investment path, focusing on wealth protection. Below, we’ve outlined some basic stock market strategies to help you get started.

1. Investing

An investor’s main goal is to purchase the greatest future earnings stream for the lowest price possible. Ideally, an investor will select a company with in-demand services or products with efficient production and delivery systems in place to maximize profit. Why? As the company grows in revenues and profit, the investor can expect to profit in turn. In short, investing allows you to spend a little money now to earn more over time.

So, why don’t more people invest in future earnings? Unfortunately, for many, investing isn’t considered to be the most “exciting” way of spending your hard-earned cash, but it is one of the wiser decisions you can make with your wallet.

Ways to Reduce Risk: Fundamental Analysis

A valuation technique commonly used by investors is known as “fundamental or value analysis.” This technique was founded nearly a century ago by Benjamin Graham and remains largely unchanged today. Smart investors reduce their risks by purchasing stocks only from companies whose stock prices are lower than their “intrinsic” value — a value determined through research more commonly known as a fundamental analysis. The intrinsic value is then compared against the market value as a whole and the companies’ top competitors.

2. Speculation

The founder of one of the original mutual funds in the U.S., Philip Carret, felt that speculation is the sale or purchase of stocks or securities while expecting a profit from price fluctuations. Essentially, speculation is the selling and buying of stocks based on an anticipated advantage of knowledge regarding stock or market trends. For instance, an investor would be speculating if they were attempting to predict the next market trend and invest before the rest of the market does.

It’s important to note that stocks move in trends and can quickly change depending on the mood of the stock market participants. Therefore, keeping a close eye on the stock market and knowing when to cut your losses is key to profiting from your investments. In the past, successful speculators would monitor stock prices and identify patterns, known as levels of resistance and support, to guide their sells and buys. Ideally, you would purchase stocks rebounding from a support level and then sell them as they approach a resistance level.

Some other excellent stock trading strategies may include:

  • Trading only when the market is profitable
  • Buying stocks that are rising and selling stocks that are falling
  • Never buying more shares of a stock that’s decreased in value
  • Never waiting for a margin call; leaving the trade
  • Keeping stocks that have reached a new high
  • Selling stocks when they reach a new low

These techniques have turned into what is currently known as technical analysis or speculation. In other words, patterns repeat themselves, so by reviewing past and current prices, you can try to predict future prices and stock market trends.

3. Trading

Technological advances have allowed individuals to employ new tools to follow and interpret the stock market. Wall Street firms and individual investors have embraced new stock trading philosophies, with many employing complex algorithms and artificial intelligence programs to buy and sell stock in microseconds.

A trader is an individual who buys and sells stocks or securities within a short amount of time, often holding onto their stocks for less than a single trading day. A trader is much like a speculator, but there is one big difference: traders focus on existing trends rather than trying to predict future trends.

Most trading occurs through financial institutions’ programmed systems, which analyzes price trends and places orders based on the results. This is sometimes referred to as high-frequency trading or HFT. Trades are automatically entered into the system if and when specific trade criteria is reached. The impact of HFT on the stock market remains controversial, with many concerns that automated trading exacerbates major market disruptions and reduces market liquidity.

While most individuals don’t possess the financial ability to imitate the trading habits of larger financial institutions, day trading continues to be a popular strategy in the stock market. Day trading typically involves several trades each day with the hopes of earning a small profit per trade. Margin traders who buy and sell a specific stock or security four or more times a day within a five-day window are known as “pattern day traders.” Pattern day traders are subject to special margin regulations with a required equity balance of at least $25,000.

4. Index Fund Investing

After struggling with the stress of inconsistent returns, many securities buyers will turn to professional portfolio management through mutual funds. The first-ever passively-managed index fund, Vanguard Group, was created in 1975 by John Bogle, Wellington Management Group’s former chairman. This eventually led to the creation of the largest index mutual fund in the world, the Vanguard 500 Index Fund Admiral Shares, which requires a minimum investment of $10,000. Index investing, while facing much skepticism from other industry experts, remains one of the most popular stock market strategies today.

While initially ridiculed, over time Bogle’s ideas became popular and set the bar for many index investors. As a result, index investors are often referred to as “Bogle-heads.” Here are some key points Bogle expressed:

  • Investors can’t outperform the market.
  • Investors should always underperform the market since the costs of market participation directly reduce the market’s return.
  • Most professional managers fail to outperform market indexes.

After 18 years of successful index mutual fund investing, exchange-traded funds or ETFs emerged. Similar to the passive index funds, EFTs track specific commodity and security indexes but trade on an exchange like a common stock. Several studies to date have confirmed Bogle’s initial theory that beating the market is nearly impossible.

Ways to Reduce Risk: Asset Allocation

Buying ETFs or index funds instead of individual stocks or securities often includes asset allocation, which is a strategy to reduce risk in an investment portfolio. Periodically re-balancing the stock portfolio to restore a more balanced allocation between asset classes can help to reduce overall volatility. Additionally, owning a variety of asset classes can help to ensure regular earnings from your portfolio.

Another type of professional securities management system is robo-advisors. Robo-advisors will automatically create online investment portfolio suggestions based on criteria such as the client’s age and objectives. These investment portfolios are automatically monitored and adjusted at a much lower cost than traditional investment managers.

What’s the Best Strategy for Stock Market Investing?

Stock market earnings can be somewhat elusive, particularly in the short term. As a result, many seeking maximum returns with minimal risk are constantly searching for the best strategy for stock market investing. Unfortunately, no one has yet to discover a stock market strategy that works 100 percent of the time. Regardless, the search for a perfect investment philosophy will continue.

New investors should know that owning stocks or securities can prove stressful at times as you can never fully predict the events of tomorrow. Other market investors can often react in unpredictable ways to rumors, news, or trends, making it impossible to have the security of profits in the stock market. So, relish and enjoy your winnings, but always be prepared to cut your losses.

Want to learn more about how to make money trading stocks? Check out RagingBull’s free eBook, available for only a limited time. You can also read testimonials to discover how we’re helping our clients become better investors and earn profits from stock trading.

Jason Bond

Jason taught himself to trade while working as a full-time gym teacher; his trading profits grew eventually allowed him to free himself of over $250,000 in student loans!

Now a multimillionaire and a highly skilled trader and trading coach, Over 30,000 people credit Jason with teaching them how to trade and find profitable trades. Jason specializes in both swing trades and in selling options using spread trades, which balance the risk of selling options. Jason is Co-Founder of RagingBull.com and the RagingBull.com Foundation which donates trading profits to charity. So far the foundation donated over $600,000 to charity.

Learn More

Leave your comment