I got my first lesson in the stock market when I was 16, and since then, I have always been fascinated with it. My father invested my pocket money of Rs. 1,500 into a stock, and in a few months, the sum increased to Rs. 4,300. That’s when I made it my life’s mission to figure out how the stocks work. For the uninitiated, shares are simply the units of ownership you get when you invest in a company. If the company does well, the prices of the shares will rise, and you will get benefits like capital appreciation. The company may also provide dividends from time to time. Conversely, if the company does not perform well, especially under volatile markets, your share prices may fall. And while you cannot control market volatility, you certainly can back your investments with research and implements specific strategies. Here’s all you need to know about stock market strategies for beginners.
The need to strategise
Before we delve into the different stock market strategies, it is crucial to understand why you need to strategise before you invest. As mentioned above, the share market is extremely volatile. As such, there are certain rules in place, by which you can conduct your trades. When you implement a strategy, you are essentially formulating the dos and don’ts to mitigate the market volatility as much as possible. Strategies help you see what patterns are forming in the market, and predict, up to a certain extent, how your stocks will perform. They are backed by numbers and data that can predict how much your money can potentially grow, or at the very least, reduce the risks associated with investments.
8 share market strategies that you can implement
Successful investors typically implement a mix of all of the below-mentioned share market strategies. Let’s take a look at each one individually.
Most people invest money in the share market intending to grow their capital. As such, growth investing remains the most popular of all share trading strategies. In growth investing, you typically pick stocks of companies that reinvest your profits. Here investors choose against redeeming and exiting the shares upon booking profits and instead opt to reinvest their capital and their profits. Reinvesting profits allows companies to improve their cash flows and operations, which in turn leads to the growth of the company. Since the money is reinvested, investors are not provided with a dividend pay-out. However, with no dividend pay-out, reinvesting the capital and profits may lead to an increase in the price of shares, and by extension, your profits. This, in turn, proves beneficial for you as the investor, as it leads to the growth of the capital investment amount.
Another common reason why people turn to the share market is that it has the potential to create an additional source of income. All you have to do is invest a fixed sum, say 15% of your primary income, regularly, and with discipline in a few share market instruments of your choosing. For instance, you can invest in shares, bonds, growth or dividend mutual funds and other such investments, so that you get an additional income source. The percentage of the income you invest should ideally be in proportion to your age and the years of employment you have ahead of you. For instance, younger people may have lower monthly incomes so they can invest a smaller percentage, but as you age and your income increases, you can invest more.
Value investing is one of the most prominent share market trading strategies, usually employed by experienced investors. Under this strategy, investors generally purchase underpriced stocks of strong companies when they are trading below their intrinsic value. Intrinsic value is simply the measure of the actual value of a share and not its market value. Investors determine a share’s intrinsic value by fundamentally analysing the company offering the stock. Upon identifying the currently undervalued stocks, investors buy them in huge volumes and hold on to them for relatively longer tenures. Once the market realises the actual value of the stock, its price increases on an upwards trajectory. At this time, investors sell their shares to book huge profits. Value investing thus allows investors to get shares of good companies at relatively low rates and assists them in fetching substantial, returns in the long term.
While investing in the share market, you must choose your stocks prudently. If you are beginner, with little to no experience in the world of share trading, you should implement the share trading strategy known as quality investing. Quality investing means that you should pick stocks of excellent and renowned companies. Such companies are known as blue-chip companies, which have been around for several years, and show stability. These are stocks of established companies which have remained unaffected even in highly volatile market conditions. You can conduct a qualitative analysis of a company based on its fundamental information available in the public domain – its leadership, its prospects, and so on. Note that the stock prices of blue-chip companies are typically higher than most other stocks, but you can purchase a few units and gradually increase them.
Follow the trends
While speaking of stock market strategies, we must mention trend following, also known as riding the trend. As a trend following investor, you need to buy stocks when its prices begin to go up and sell them when your target price is reached. As such, with stock trading trends, your aim should not be to predict the market price of your stock, but rather to follow and keep up with trends that are emerging. When you follow a trend, you get access to several factors and mathematical calculations that can help determine the movement of the stock. This, in turn, enables you to generate the trade signals and calculate the current market price of stocks as well as channel breakouts and moving averages. Trend following takes a lot of learning and understanding of the market. It would help if you learned about the different types of share trading charts and patterns to identify trends.
Long term investing
Long-term investing is one of the most basic stock market strategies for beginners. It merely means that you should only invest the money that you will not need in the next five years. Now, most people invest in schemes like these – PPF, EPF, and other 80C schemes. But these investments don’t provide higher returns as compared to shares. Moreover, there are penalties associated with premature withdrawals. And while you should invest in the schemes mentioned above, you should also try to invest money, typically a lump sum amount, in stocks from the long-term perspective. You could choose good quality equity schemes or other forms of equity investments, and give them the time they need to grow. Staying invested in the long term allows your stocks to weather the ups and downs of the market and can gradually lead to capital appreciation. In the long-term investment strategy, patience is critical.
Don’t keep tracking the market
Contrary to popular belief, you should not track the market every day. Daily tracking is recommended for day traders, not delivery traders. Day traders are those who buy and sell their shares, every day, on the same day, intending to book small, albeit daily profits. On the other hand, delivery traders are those that buy shares intending to hold them and sell them for a profit, at a later date. As a delivery trader, it is sometimes best not to think about the money you have invested. This is an especially crucial strategy to implement in bear markets, i.e. when stock prices of most companies are falling due to unfavourable market sentiments. At this time, it is essential to remember that the market is down in general, so the chances are that stocks of most other companies are also under- performing. As such, it is best to avoid tracking the market at such times.
Avoid investing based on rumours
Most new investors make the mistake of investing in companies based on rumours. They may have received advice from a friend, a family member or a colleague, who is not a market expert. Indeed, sometimes, you cannot rely on market experts as well. Tune out the voices of shouting anchors on business news channels and instead back your investments based on research. Rumour-based investing often has negative results and can put you off the share market altogether. Instead, it would help if you based your investment on factual data which you can find on reliable sources like websites of the NSE, BSE, and the company offering the shares.
Final note: A stock market is a complicated place. It comprises millions of players and thousands of companies that want you to invest in them. As such, it can be overwhelming. Not only do you need to know the different share market trading strategies, but you should also familiarise yourself with the necessary share trading terms. Moreover, you can benefit from learning how to read share market charts, patterns and trends. As any experienced investor will tell you, learning about the stock market is a never-ending business. You may have all the possible share market strategies up your sleeves, but you have to put in the work if you want to succeed.