It’s easy to say that you want to invest in the stock market; but what specifically are you hoping to gain by becoming a stock market investor?
Choosing the best investment strategy for your particular goals will help you start to narrow down the type of stock you want to buy and make you more likely to succeed in the market.
What are investment strategies?
Investment strategies refer to the approach you want to take when buying individual stocks. Are you looking for big gains and are happy to take a bit of risk in order to pursue them? Do you want to generate a guaranteed cash flow every few months? Do you want to show off your ability to time the market by jumping on underpriced stocks at just the right moment? The answers to all of these questions encompass three different investment strategies: growth stock investing, dividend stock investing, and value stock investing.
Why do investors base the stock types they choose on different investment strategies?
Because you need to know what your investing goals are before you can pick a stock to buy. Growth, dividend, and value stock investing are all very different and require investors to look at the markets in different ways. Factors including age, risk tolerance, and your desired time horizon play major roles in deciding which of these strategies is most suitable for your specific investing wants and needs.
What are the defining characteristics of each different investing strategy?
1) Growth Stocks
A growth stock typically offers the best combination of robust revenue and earnings growth, along with appreciation in the price of the stock itself. These benefits often come with increased risk, though, as many growth stocks are more volatile and can move both up and down fast. Growth stocks are recommended for investors with higher levels of risk tolerance who are looking for the biggest gains possible, traits often associated with younger investors.
2) Dividend Stocks
Dividend stocks, as their name suggests, are stocks that distribute a share of their profits to shareholders in the form of dividends. These dividends most often occur on a quarterly basis, and will depend on how well the stock is performing. These stocks tend to be less volatile, trading the possibility of huge growth for the certainty that comes with receiving cash dividends every three months. Dividend stocks can be a strong choice for older investors and retirees on a fixed budget who are looking for a steady source of income.
3) Value Stocks
Value stocks are stocks that are depressed in price relative to their industry peers. Investors use gauges such as a stock’s price-to-earnings ratio and price-to-book ratio to measure if it can be considered a potential value stock. Investors who take the time to extensively research such stocks can often make a healthy profit if they pick correctly. Just keep in mind that sometimes a stock will be depressed in price for a good reason, causing big-money institutional investors (the primary engine behind stocks’ price movement) to stay away and meaning your profits never materialise.
Here are some examples
1) Growth Stock
Amgen (AMGN) is a California-based multinational biopharmaceutical company, with a market cap of nearly $150 billion. The company has experienced a recent uptick in earnings growth, a leading indicator of success for growth stocks. Amgen’s stock has climbed 36% from its March 2020 lows.
2) Dividend Stock
Medtronic (MDT) is a medical device maker based in Dublin, Ireland. The company generates most of its revenue and earnings from the lucrative US healthcare market. The stock has offered the best of both worlds for investors lately, with its price surging 46% from its March 2020 lows while also delivering a 2.2% dividend yield.
3) Value Stock
NortonLifeLock (NLOK) is an American maker of cybersecurity software. You wouldn’t normally call a stock that’s jumped 43% in the past six months a value stock, but NortonLifeLock’s stock carries a microscopic price-to-earnings ratio of less than 4-to-1. This makes it an attractive potential buy based on traditional value-related metrics.
How do I find stocks broken down by investment strategies?
We recommend that you start right here on this site. Every month, we provide fresh top-10 lists of growth, dividend, and value stocks worth investigating.
Hopefully you found this breakdown of stock types by investment strategy enlightening. Up next is a look at stock types broken down by market capitalisation size, to help you keep improving your knowledge.