Stock markets are a great way to create wealth. You can create wealth in the long term, and if you are inclined and have the chops, you can also create wealth in the short term. That said, too many people jump into stock markets without knowing what to do or not having a specific strategy. They rely on speculation, social media trends, and random advice to make money. They are familiar with terms like Dow, Nasdaq, NYSE, etc., and get inspired to invest and trade so they open a brokerage account and start to buy and sell stocks. Oftentimes, they are caught off guard because of market volatility and bear markets and incur losses. But it doesn’t have to be that way.
Having a strategy that fits well with your personality and risk-tolerance can be all the difference in whether or not you will be able to make money in the stock markets. There are several different ways to approach investing or trading so here is a nice summary of the most general and well known strategies out there.
Here are 10 Strategies to Make Money in the Stock Market
Buy and Hold
A famous Warren Buffett quote is, “Our favorite holding period is forever.” This strategy means buying stocks in blue-chip companies and holding them for a long time. Blue chips are companies with a strong performance record stretching back years, sometimes decades, and have weathered multiple market and economic scenarios. They are regarded as some of the best stocks in the stock market. This strategy is safe for people who don’t have time to monitor markets daily.
Futures and Options
This strategy is becoming one of the most popular over the last several years and for good reason. Futures and Options (F&O) are investment derivatives in the stock market. They allow investors to speculate on the future price movements of an underlying asset (like stocks, commodities, or indices) without directly owning the asset itself. Options trading is deployed by most traders these days as it can act as income generating strategy and has the potential for massive gains within a quick window of time. That being said, it can be risky if you do not know what you are doing. It’s also essential to choose the right options trading platform in the market as picking the wrong one could cost more money and/or be overly complicated for your skillset.
Public.com is one of the best options brokers around for a new trader as it has the lowest fees and a intuitive design that makes it easy. Its app is easy to use and has features so that options traders can focus on what’s most important: Finding new options and trade opportunities.
Fundamental Analysis
This investment strategy focuses on breaking down a company’s intrinsic value (stock) instead of its current stock price. This helps you understand its financial health, future growth potential, and overall business prospects. You will analyze its competition, moat, regulatory aspects, and technological advancements. This strategy helps you take a long-term view of your investments. You ignore short-term market volatility because you understand the inherent and external risks that could impact the company. You are an intelligent stock market investor focused on the larger picture.
Value Investing
Sometimes, a stock is not valued as it should be. It is undervalued. The fundamentals of the stock, like future potential and financial health, are strong, but the market has inefficiently priced the stock lower. Savvy investors identify these stocks and buy them because, at some point in the future, the markets will price the stock correctly, which means the stock price will zoom. You can check out financial ratios like the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and debt-to-equity ratio of a company and compare it with the industry average. You can do a discontinued cash flow analysis of the stock to determine whether the market is pricing it lower.
Momentum Investing
This investment strategy capitalizes on the stock movement of a particular share, commodity, or sector. For example, current copper prices (April 2024) are at a 2-year high because the world is focussing on a green transition. If you had caught on to this trend early, you could have purchased copper on commodity markets or stocks that deal in copper to take advantage of rising prices. You ride the momentum. This is an intelligent strategy to make money in the stock market in the short term.
Dividend Investing
Dividend investing involves buying stocks in companies with a history of paying out a portion of their profits to shareholders as dividends. This investment strategy is excellent for people who want assured passive income. Investors prefer a steady income stream as they get closer to retirement age. A key metric to identify dividend investing companies is the dividend yield: The higher the yield, the better the company. However, you must ensure that you choose a company with a solid history of paying dividends. Choose companies that have consistently grown their dividend payouts every year. A Dividend Aristocrat is a company that has grown its dividend every year for 25 years. A Dividend King has grown it for 50 years.
Dollar-cost Averaging
Sometimes, it is possible that you identify a good company or an ETF but don’t know what’s the right time to invest in it. With this strategy, you invest a fixed amount of money into a particular stock or ETF at regular intervals (weekly, monthly) regardless of the price. This approach averages out the cost per share over time, mitigating the risk of buying at a peak. For instance, gold prices have given a CAGR of 12.46% in the last five years. If you had invested $500 in a gold ETF every month for five years and one month, you would have a corpus of $41,563 on an investment of $30,500.
Index Funds or ETFs
People often want to invest in stock markets but don’t know which company to invest in. They know the power of stock markets but are hesitant to put money into a particular stock. You can invest in index ETFs. These are passively managed funds that track a specific market index, like the S&P 500. Investing in index funds provides instant diversification and reflects the overall market performance, offering a good starting point for beginners. The Vanguard S&P 500 ETF has delivered a CAGR of 13.59% in the last five years. If you had invested $5,000 in May 2019, it would be worth $9,046 now.
Technical Analysis
Technical analysis is when you analyze historical price and volume data to identify trading opportunities. Unlike fundamental analysis, which emphasizes a company’s underlying value, technical analysis is about chart patterns and trends formed by price movements and trading activity. This is where you hear terms like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), support and resistance levels, Fibonacci, etc. Short-term traders mainly use this to make money in stock markets.
Contrarian Investing
As the name suggests, this investment strategy involves going against the current market sentiment and buying stocks that are not in favor. Contrarian investors believe the market has overreacted and the stock price will eventually rebound. This approach requires substantial research and a high tolerance for risk. It is not recommended for inexperienced investors.
