In the previous two posts we considered why you want to enter the stock market (your financial goals) and gained an understanding of your tolerance to risk (your risk profile).
By having a better appreciation of your financial goals and risk profile you’re far more likely to develop an investment (or trading) strategy that is right for you.
If you develop an investment (or trading) strategy that is in line with your goals and risk profile, you have a far grater chance of being successful over the long run. Developing your own stock market strategy is not difficult and is far more profitable and rewarding than relying upon some mass marketed trading system.
It doesn’t matter whether you are better suited to investing or to trading. The most critical factors are that you:
- Understand what you are best suited too (investing or trading); and
- You concentrate on developing a strategy that is in line with YOU, your goals, your risk profile and YOUR STRENGTHS.
So what strategies are available to the stock market beginner?
There are basically three general market strategies available to the stock market beginner: trading, investing and active investing. Each has its pros and cons?
(Short term) Trading:
The time frame for trading really depends on you, the individual, and what you consider to be short term. The generally accepted period for short-term trading ranges from intra-day and day trading, up to holding a stock for ten to twenty days.
Regardless of the actual time frame the objective when trading stocks is to make money from an increase in the stock price if your are long (buying stock) or from a decrease in the stock price if your are short (selling stock that you do not own). This process is known as capital gains (i.e. your invested capital is gaining or increasing in value).
Successful traders tend to have the following attributes:
- A high risk tolerance; but are also
- Prepared to manage risks (threats to your trading capital) quickly and decisively; and
- Have the ability to overcome the fears and mental challenges associated with constant fluctuations in their capital.
There is little room for error when trying to profit from short term stock price movements.
Investing:
Like trading, investing can also mean different things to different people. Investing is quite often described as ‘buy and hold’ type strategies. This can be a simplistic view. Investing involves holding a stock with a medium to long-term view. This generally means buying and holding a stock for a minimum of twelve months, but more likely for a number of years.
The objective when investing in a company is to participate in the medium to long term growth of that company.
By investing in the growth of a company, an investor aims to make money from not only the increase in the share price (capital gains) but also by sharing in the profit of the company. The profit is distributed to an investor in the form of income which is known as a dividend.
Long term stock investing is a great way for the beginner and risk adverse person to be actively involved in stock selection and portfolio management. The advantage of investing is that the long-term investor does not have to deal with short-term fluctuations in capital like the trader.
Time management is another great advantage of investing. The average investor needs to spend far less time in stock selection and portfolio management than the day-to-day trader.
‘Active’ Investing:
Active investing is similar to long-term investing but rather than using a buy and hold strategy, the active investor takes a more proactive interest in the stock selection, risk, position and portfolio management process.
The main aim of active investing is exactly the same as the long-term investor (capital growth and dividends). However, unlike long-term investing, this strategy involves the ‘active’ investor making regular decisions about their portfolio and the buying, selling and holding of stocks. The active investor’s intentions are to hold stocks that are performing well, and quickly sell down stocks that are underperforming the market (or losing money).
In general, the active investor usually buys stocks with a three to twelve month view, but profitable positions can be held for much longer.
Active investing is the best of trading combined with the best of investing, and as such active investors tend to share many similar traits and key attributes with short-term traders.
So there you have it, three broad market strategies. Which is best for you? Well, it really depends on you, your goals, experience and self-discipline.
Beginners are generally best suited to starting with a passive approach like investing, whilst they build up their knowledge and skill base. Unfortunately most beginners are drawn to the get rich quick appeal of trading. Very few have the mental discipline, knowledge or skills to survive.
Developing an appropriate stock market strategy is vital and I highly recommend you consult with a financial professional.
That brings to an end the series of posts on personal analysis and development which is the first step in becoming a successful, savvy investor. Next week we’ll take a look at the next step in successful investing: understanding the stock market and the broader economy.
If you found this post helpful or would like more information:
- Download my FREE EBook (you’ll also receive a regular FREE eNewsletter with ideas and tips on how to build long-term wealth) or
- You can leave a comment on the post or
- Email me at comments@stockmarketprowess.com
