July 3, 2013 in 3rd Guide - Portfolio Building
3 basic stock market strategies
Money making from 3 basic stock market strategies include investing, trading or speculating to make money work for you when used alone or in combination. All can produce money making stock market wins for you. Each approach needs different knowledge, skills and time to deliver their best result.
What stock market strategy works best?
Money Choices That Grow Wealth course 250, lesson 2 answers the question, what stock market strategy works best? At the end of the lesson, links to related content help you learn more.
What you learn:
We look at the 3 basic stock market strategies, investing, trading and speculating in discuss four ways they differ:
First, we identify the strategic differences between each.
Second, we examine the time needed to learn and use each strategy well.
Third, the risks of each strategy are identified and considered.
Fourth, we look at the the huge differences each strategy returns.
FAQ about 3 basic stock market strategies
Investing, trading and speculating are the 3 basic stock market strategies that make money work. Used alone or in combination, all can produce stock market profits. Each of these basic approaches need different knowledge, skill and time to produce the best results. Time and skill to use each well varies from a minor involvement needed for simple income investing, much more knowledge and time needed to trade well and complete concentrated attention needed to use a speculative approach with skill.
Investing defined by White Top Investor, means buying productive income producing assets like bonds or dividend paying stocks. That steadily earns profits in all market conditions. In contrast, trading depends on finding and buying a stock at low prices to sell at high prices. While that selling captures profits, it forces the trader to find another rising stock to buy and do it again, and again and so on. In favorable markets, traders can earn more than income investors. But importantly, traders have higher risks and can miss taking profit or even lose money by picking the wrong stock or trading in falling or slow markets. Overall, trading returns are more boom and bust, hit and miss, while income investors collect steady secure income in all markets.
Begin with the 5 Basic Investing Strategies: 1. Value investing picks stocks trading under their intrinsic, book, or fundamental value. 2. Growth investing, buys stocks of companies with above-average growth. 3. Momentum investing, buys stocks moving to higher prices on increasing trading volumes and selling any stocks with falling prices or those that stop rising, 4. Dollar-Cost Averaging steadily invests the same amount in a fund or stock during each period (week, month, quarter, or year) to minimize the impact of volatility, 5. Income investing, buys stocks that pay dividends or bonds paying interest for a reliable income stream. Then develop a wealth building plan with your best combination.
Investing, trading and speculating are the 3 basic stock market strategies that make money work. Used alone or in combination, all can produce stock market profits. Each of these basic approaches need different knowledge, skill and time to produce their best wealth growing results. Alone or in combination, all can make you money, the only reason to buy into any market. Long term, investing consistently produces the best outcome. On the other hand, trading can win in the short term when markets are favorable. And speculating gains are less reliable and not consistent, although can show spectacular results when a winner hits. However, speculating gains are at much higher risk.
In strong bull markets, traders outrun investors by showing bigger returns. But long term, in all market conditions, the story changes to favor income investors. In fact, investors have won over traders for the 4 centuries shock markets have been around! That happens because income earning investors constantly and regularly get paid. Investing those payments opens the way to powerful compound returns! Traders on the other hand have to sell out to realize a trading profit. Then they have to start all over and find other profitable trades to do it again and again. That can and does work very well in positive markets, but not so well in down or even sideways markets. In favorable markets, investors and traders can both ride growth stocks to profit.
Successful investors understand The 3 Prime Investing Principles:
1. Risk and return management,
2. Smart Diversification,
3. Value of time and compounding.
They also know The 7 Essential Wealth Building Strategies:
1. Plan,
2. Save,
3. Invest,
4. Cost Control,
5. Loss Control,
6. Filter Noise,
7. Monitor and Review.
Investment thinking puts money to work growing more!
1: Strategic differences
Investing, trading and speculating are the 3 basic stock market strategies to stock market money making. These methods need different knowledge, skills and time. They have different risks and produce different results. All 3 basic strategies can make money work as to produce stock market profits.
The many variations and combinations of these strategies are evidence of the unlimited human imagination. Those variables become even more complex with the application of computer investing and trading technology. All the endless strategy variations are based the 3 basics. So we begin by defining the basic differences between these strategies.
Stock market investing strategy
Investing is the quiet, mature and stable wealth building of the 3 basic stock market strategies. It is the slow and steady strategy used when we seek income by buying shares in dividend paying companies. To meet the White Top Investor investment grade standard, the company must pay dividends. Investors collect those dividends and consider any equity growth to be a very nice bonus.
Superior investors buy shares in profitable, growing companies and never consider buying any others. That is the core White Top Investor strategy. Investors enjoy traveling the stock market highway on cruse control at a safe steady speed.
Stable growing profitable dividends
Owning shares in those stable and dependable profit producing companies lets investors build a reliable and secure income producing portfolio. By restricting their purchases to high quality income paying companies, investors also enjoy a low to moderate risk approach to the stock market.
Such an income building approach forms a solid conservative investing base that produces steady and dependable returns. The profits and steady growth of such companies gets reflected in their rising share prices. That increase in equity value is a nice bonus for income receiving investors.
Financial services like trading over investing
Financial service industry pros pays lip service to the investing approach. Financial advisors earn less from investors than they do from traders or speculators. Long term investors keep costs at a minimum including the fees advisors need for their income and bonuses. They and their companies get the lowest returns from servicing investor income accounts.
Income investors seek dividend paying stocks as long term holds that will pay them years of dependable income. The risk profile for investment grade stocks ranges from low to medium risk. Investors enjoy the income while holding close to capital rule one – don’t lose money!
Stock market trading strategy
Trading is at the center of stock market action, movement and noise when considering the 3 basic stock market strategies. To win as a trader, you need price movement to trade in or buy at low prices then trade out by selling at higher prices. The price difference, less your commissions or trading expenses, is your profit. Traders are in a hurry traveling the stock market highway as fast as they can get away with.
Any stock that is moving can be played as a trade. In that sense, even investments (quality profitable, dividend paying, growing companies) can be trades. However, trades are not restricted to profitable, dividend paying or growing companies. They can also be speculative shares that have price movement and some volume. Traders need only price movement so any stock can meet that narrow criteria.
Experienced traders produce great returns!
Skilled traders can produce excellent returns. To become a skilled trader requires knowledge and skill levels far beyond a basic investor. Trading is not the place to begin to learn about making money work in stock markets. First become a knowledgeable investor. Then, if you want to trade, learn the the needed skills and techniques to do it well.
Rising share prices attract trader buying when they expect prices to rise higher yet. Traders seek to profit by buying low, or at least lower and selling high or at least somewhat higher prices. They profit from the rise in share prices, not from growing revenue or bottom line profit. When it works, a good trading strategy can produce excellent returns for traders.
That share price movement has trade-offs. Traders accept more risk and price volatility than investors. On the positive side they ride trading stocks to higher returns from the growth in equity values. Most often, in the short term, that price growth produces more profits than the income approach. Those gains can happen faster than any reasonable dividend stream could ever produce.
Trading can deliver more profit, faster
Compared to income investing, trading produces more profit, sooner. Besides needing more time to play well, trading profits come at higher risk and with the need to sell before you can bring those profits home. Traders who do it well, spend far more time managing their portfolios than an investor has to. For the very best results they also need a considerably higher level of knowledge about the markets, economy and good sources of company information.
Profitable and even exciting, traders are the darlings of the financial industry and both business and mainstream financial media. The regular buying and selling produces great revenue for advisors and the industry. Advisers and the financial companies take their cut if trades are profitable or not.
Trading action attracts media attention
All that activity produces lots of stories, activity and noise to attract and keep media news interest. That means trading activity and information gets far more media exposure than any other stock market strategy, activity or information. Those volumes of excited news reports gives newcomers the impression that trading, traders and trading reports represent the market rather than just part of it.
The time needed to trade well is far greater than the time needed to invest well. Traders have greater risks of loss and much higher possible losses. There are trading strategies that manage risk well but none with risks as low as investing.
Trader holding periods range from nanoseconds to months. Unlike investors that profit from income, traders must sell to realize profit. Selling out to take profits means they must seek another trading opportunity before finding more profit. While investors enjoy steady, stable income, traders profits and much more irregular. In the stock market community, trading, buying, selling and research employs many people than other strategies and accounts for most stock market action and time.
Financial advisors love traders
Understandably, they hate that! Both the financial service industry and the media reports, recommendations and opinions concentrate on trading or the buying and selling action. That action produces much more excitement, noise, news and fees! But that racket can mislead investors, particularly new investors, into thinking stock market investing means trading. Advisors love traders because active buying and selling produces much more fee revenue for them.
While the industry and media coverage encourages trading as the way to stock market success. Well managed investment accounts pay the smallest fees to advisers or managers. In contrast traders pay several times as much. For long term money and consistent performance the clear money making strategy winner is investing. As a long term approach that consistently works, investing produces reliable results and lets us sleep well at night.
Be aware of high frequency trading
New for the 21st century and affecting all 3 basic stock market strategies, is high frequency trading. From the beginning of the 21st century, traders in particular must be aware of high frequency trading. They must know about high frequency trading and the impact it has before considering using a trading strategy in stock markets. High frequency trading changed everything about markets and investing. For in depth coverage of this big topic see the White Top Investor course 510, High Frequency Trading Explained.
Stock market speculation strategy
Finally among the 3 basic stock market strategies are the speculation strategy. If traders are players at the center of stock market attention, speculators are those that are seeking this year’s hit headline score! These are the newest stars of media and market attention. These are the When successful, speculations turn pennies into dollars! People attracted to speculations have dreams of realizing such huge price gains. However, like most rockers, singers, actors or aspiring stars, most speculations languish in obscurity. Speculations have more failures than the other stock market strategies.
For speculative stock plays to work, timing and circumstances must be right. Predicting speculation success is somewhat like picking the next hit song or entertaining’s next overnight discovery. For most stock market players, avoid speculations to keep their money and sanity intact.
Winning speculations can be very profitable!
For those with time, resources and inclination to speculate and accept higher risks, informed speculations can be very profitable. Speculators seek to profit from spectacular share price gains. This is the high risk – high reward crowd that need no highway! They explore the economic and business frontiers hoping for spectacular success as fast as possible!
Speculations are the highest risk of the basic stock market approaches. There is no such thing as low risk speculating. In fact, most speculations are high to extreme risk. Speculators shoot for the moon, seek home runs, swing for the fences and let it all hang out,! This approach can produce spectacular upsides.
Losing speculations can produce huge losses
But speculating can also produce no returns or real losses and at times, a total loss of capital! When done well, speculation can work well. To make that happen speculation requires much knowledge. It also means paying very close attention and spending considerable time. Speculation is a very high risk strategy. As with trading, speculators also must sell to realize profits.
A few financial advisers specialize in speculating. Be aware that very few do it well for clients over a period of years. Every transaction attracts adviser commissions. Advisers collect when clients win or lose. The client takes all the risk. Clients eat all losses and still pay advisers when selling any losing positions. This is no place for the faint-hearted!
2: Time to learn, manage and deliver
Each of the 3 basic stock market strategies take different amount of time to learn, manage and hold to realize the greatest success. Begin by taking the time to learn. Then know the time needed to manage the strategy you pick as well as the time needed to buy, the holding time and when the time comes to sell.
How much time does is take to manage using each approach and how long do you hold onto each position when you invest, trade or speculate? Managing time varies from minutes a week to virtually full time concentration during market hours. Holding times for people using each approach varies between nanoseconds to many years.
As for use of time. the time to manage each approach differs and time needed for the best results changes with each strategy and position. The following looks at the time periods for our three basic approaches:
Investing, time to build wealth!
Managing this approach requires the least amount of time and it is fast and easy to learn. As for time in an investment, investors hold quality positions for years. All the while they continue to collect those nice dividend payments! So dependable, so boring and an excellent way to build wealth! That sort of investing is the base of the White Top Investor approach to portfolio management and wealth building.
Investors expect to hole for years; at least 1 – 3 years but in good situations, much longer. The ideal is to own the best dividend paying companies for many years. When you own an excellent dividend paying stock, there is little need to buy and sell very often so this approach has very few transactions.
One happy result of the investing approach is lower costs! Transaction costs are low because there are few trades. Low transaction costs keep more money in the pockets of investors or in the market working to build your wealth. A portfolio of dividend paying winners is a beautiful and productive financial creation.
Trading, time to score profits!
The most successful traders know the stock markets very well and the sectors they trade as well as the companies traded. Learning those interacting parts takes time and experience. Without hands on guidance, the lessons learned by experience can be very expensive. Anyone aspiring to become a successful and consistent traders needs to find a mentor.
Traders Traders buy and sell positions in seconds, days, weeks or months. Few traders hold for over a year. With the wide spread use of computer driven high frequency trading Other than short-term or day-traders or high frequency trading computers, most human traders hold positions for a few weeks or months. Traders buy positions anticipating a rising stock price.
Often they wait until a stock price actually begins moving up before buying. Traders taking that approach most often sell when the upward price movement stops.
Good traders sell under-performers early
Portfolios of traders usually have some spectacular winners and more moderate gainers. But traders also have duds the do not move up or move the wrong way. Better traders correct mistakes early. They sell losing positions as fast as possible. That stops any growing losses.
The trading approach produces many trades and their related costs. Advisers love these guys! They pay so well and so often! This approach has the highest costs.
Speculating, time for the big win!
Most speculators hold for weeks or months. Taking this higher risk approach to making money can mean holding positions for very long or for very short periods.
When they happen, winners are the stock market shooting stars! The best of this lot move decimal points! On the downside, losers sink ships and take all the capital to the bottom.
Speculation results vary over the widest possible range. Knowledgeable speculation, done well in the right circumstances, produces stunning returns. On average, most speculations produce tears. This approach has the potential for the highest losses. Far too often bad execution puts speculations in the financial graveyard.
3: Risks range from low to extreme
Each strategy among the 3 basic stock market strategies has a different risk profile. Managing risks well begins with knowing the different levels of risk and what causes risks to rise. To begin understanding risk means knowing the possible downside of any strategy. Risk is the level of uncertainty or likelihood of loss.
Don’t fall for the high risk, high reward tale. Higher risk does not necessarily mean higher return. There is a considerable amount of nonsense written by the financial industry, financial media and shamefully academia that directly relates risk to reward. Such misleading work conveniently overlooks downside assessment and management, the real key to risk control. If you can lose it all, risk is high. But if downside is limited, risk can be moderate or even low.
There are ways to bring home excellent returns without taking high risks. There are also many high risk situations that offer little or no chance of producing any return. No matter what the numbers are, situations that are more likely to lose money have too much risk. Begin your examination of risk by first asking, what is the downside, how much could I lose? Being sure you get that question answered will make you a better judge of risk.
Investing risks are low to moderate
Investor’s strategies range from ultra-risk avoiding to moderate risk acceptance.
Trading risks are low to high
Trading risks have a very wide range of risks depending on any specific trading decision.
Speculating high to extreme risk
Are you in a speculation or a con job? Always consider, will there be a buyer for my position? If not, how will you profit? Who will buy from you? If there will be no buyer, the value of you position could go to zero! In that situation, your risk is 100%!
A simple check, speculation or con job?
Try this simple check. In the early days of price movement, sell a little back without notice to the promoter or stock pusher. If that sale does not happen quickly, seamlessly and profitably, it is time to go. Get out all you can as soon as you can.
4: Returns from none to very high
Returns vary by both the time and choice of the 3 basic stock market strategies used. The best overall long term result comes from investing because it is easy to put in place and manage. That makes it the go to wealth building strategy. Your best wealth building results happens by following a stock market success plan.
Investing, trading and speculation are generalized strategies that all come with many variations and refinements. This examination only looks at understanding the basic generalized differences. For wealth building, White Top Investor recommends building portfolios around income investing base. Once the base gets established, some investors can choose to layer on a growth stock level to their portfolio. Adding this growth trading layer can accelerate their portfolio development. After both the investing and growth layers are producing results, risk tolerant investors can add a speculative level to take advantage of such possibilities and opportunities.
Trading delivers short term performance
In the short term, under favorable conditions, when trading is booming or speculations are producing fabulous returns, investing can seem like the slow lane of wealth building. However, over any long-term period, investing outshines all other strategies when in comes to consistent wealth building. Trading can produce the greatest results during short term periods of large price movements.
Great traders take years to develop
Although trading takes considerably more time to learn, manage and execute well, trading does produce very good results in good times. It just does not work well at all times or in all markets. That means trading returns show great variations over time, by market, sector and the individual stock.
Year in, year out trading returns can be good but over the long term never out performs the steady performance of an investor’s income producing portfolio. That fact of stock market life frustrates many traders convinced their superior knowledge and skill will allow them to grow faster.
They are like a sports can driver convinced superior driving skill and a powerful engine will beat all others. However, Grandma can put the family investing sedan on stock market cruse control and win this race, when it runs a few years. enough. Even professional traders and hedge fund managers have taken this bet and all lost over 10 years.
Unmatched short term speculation returns
When speculations are working, nothing comes close to their short term performance. During the 1990s I parlayed a small stake into a million speculating on resource and technology plays. When they work, speculations multiply money. However, those times are unpredictable, limited and do come to an end.
When conditions change the sector that produced all the success, typically goes dormant. Often for years or even decades. For stocks based on stuff people harvest, dug or pumped from the earth building or expanding production takes a long time. As a result, commodities including agricultural, mineral or energy related stocks can produce a pricing Super Cycle. Super Cycles last a long time, about three decades!
Rising prices increases production
When demand rises, prices rise to get producers to make more. That takes years for producers to plan, invest and increase production. Time after time, the expansion goes too far and increases production until too much product goes to market and prices fall. That keeps any growth in check for years until demand again exceeds production. Then the cycle repeats.
Speculations that are early to pick up on the expanding trend show huge price wins. Anything can be subject to speculation. The newest technology, cryptocurrency and marijuana related stocks are examples speculations in vogue at the time this is being written.
What stock market strategy works best? Answered!
While the 3 basic stock market strategies to stock market profits can make money work, investing produces the best long term wealth building results. Investing offers the easiest strategy to learn and manage while consistently producing the best returns at the lowest risk.
Lesson takeaways,
3 basic stock market strategies
Money making from 3 basic stock market strategies include investing, trading or speculating to make money work for you when used alone or in combination. All can produce money making stock market wins for you. Each approach needs different knowledge, skills and time to deliver their best result.
- Differences among 3 basic stock market strategies
- Investing buys and holds shares to focus on building income by holding shares in profitable, growing dividend paying companies
- Trading requires buying low and selling shares higher to profit. Any moving stock, in a profit making company or not, qualifies. To win, traders need price movement and selling to realize the gain. Then endlessly repeating the process to seek more profitable trades.
- Speculating requires buying very low and selling very high seeking big wins. Like trading, speculators must endlessly profitably repeat their process to produce gains.
- Time to learn, manage and produce results
- Investing can be learned quickly, managed with ease, monitored in minutes a day and consistently produce good results.
- Trading takes considerably more knowledge of markets, stocks and trading behavior as well as time to learn well. The best traders pay close attention to markets and their positions. They are engaged in markets throughout the trading day and all trading days. Time in positions can dramatically change results.
- Speculating is the most intense strategy taking the most time to play well. Successful speculations can produce spectacular results and repeatable in favorable circumstances. But conditions and markets change and results can vary from hot and spectacular to stone cold and total losses. Speculation takes the most time and produces the most irregular results.
- Risks vary by strategy
- Investing offers risks from low to medium
- Trading risks range from low to high
- Speculating risks are higher to extreme
- Returns vary by time and strategy
- Investing offers steady consistent returns
- Trading offers returns ranging from excellent to none
- Speculations offers returns from spectacular to total losses
- Wealth building winner among the 3 basic stock market strategies is investing.
Other lessons related to:
3 basic stock market strategies
3 More small investor advantages
Know the trend for market direction
3 Distinct approaches to investing
Investing buy high sell low true or false?
Weeding your investment portfolio
It’s Complicated! Speculating!
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Money Choices Grow Wealth,
lesson links:
Introduction to Money Choices That Grow Wealth Lesson 1
3 Basic stock market strategies Lesson 2
Investing factors time and knowledge Lesson 3
Stock market trading strategies Lesson 4
Speculation risks, returns and failures! Lesson 5
Next lesson 3: Investing factors time and knowledge
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