Income Artist

Investment Strategies To Learn Before Trading

Author: Jimmy Barron
Published:January 16, 2023
7 mins 29 secs

An investment strategy is a set of rules, guidelines, and principles for better investment results.

Investment strategies differ for each person depending on their risk appetite, capital at hand, investment goals, and investment horizons.

Trading strategies, however, are different from investment strategies. For example, the time horizon for trading is short, while investing is a long-term process.

Nonetheless, several principles for investment strategies and trading strategies overlap.

Today, we’ll go through 7 investment strategies every trader must know about before investing their money in the market.

Understanding these strategies will help you make better investment decisions. 

7 Investment Strategies Every Trader Must Know

There are several investment strategies you can use depending on your goals and limitations, which means there’s no single best strategy for all investors.

Here are 7 strategies to consider before making a decision. 

Strategy 1: Automated Investing (Robo-advisors)

Automated investing strategies are ideal for anyone who wants to invest passively and still make good profits.

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Also known as Robo-advisors, this strategy involves using computer algorithms to manage and execute investment decisions.

These systems rely on data and mathematical models to analyze financial markets and make trades on behalf of investors.

One of the main benefits of automated investing is that it can be more objective and less influenced by emotions than human decision-making.

It can also be more efficient, as the algorithms can analyze a larger volume of data faster than a human could.

Additionally, automated investing can be a good option for those who lack the time or expertise to actively manage their own investments.

However, automated investing has its drawbacks. One potential concern is that the algorithms used by Robo-advisors are only as good as the data and models they are based on.

If errors or biases exist in the data, this can lead to poor investment decisions.

Considering both the pros and cons of automated investing, we can conclude that it’s an effective strategy for traders who:

  • Don’t have the time to study and analyze markets
  • Can’t afford human expertise
  • Want to automate their investing process

Strategy 2: Hedge Fund Investing

Hedge fund investing is a type of alternative investment that involves pooling money from multiple investors and using various strategies, like leverage and short selling, to generate returns.

Hedge funds are typically less transparent and riskier than traditional investments. Therefore, they are more suitable for sophisticated investors with higher risk tolerance.

You must understand fraud risk management before getting into hedge fund investing.

As we already mentioned, there are transparency issues with this investment strategy and a slight to a not-so-slight chance of losing money.

Before getting into hedge fund investing, it’s essential for you to learn more about fraud risk management and understand the potential risks of frauds.  

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However, there are advantages to hedge fund investing as well. One potential advantage is that hedge funds may be able to generate returns that are uncorrelated with the stock market, which can help diversify your investment portfolio.

They might also generate higher returns than traditional investments, especially in volatile market conditions.

Overall, hedge fund investing can be a good strategy for some investors looking for higher returns and comfortable with higher risk levels.

However, it may not be suitable for all investors. It is important for investors to carefully consider their investment objectives and risk tolerance before deciding whether hedge fund investing is right for them.

Strategy 3: Index Fund Investing

Index fund investing is one of the simplest strategies to learn and understand for any new trader.

Index fund investing is a strategy that involves buying a broad basket of securities that track a particular index, such as the S&P 500.

The goal is to achieve returns similar to the overall market rather than trying to outperform it.

The main advantage of index fund investing is that it can be a low-cost way to gain broad exposure to the stock market.

Since index funds are passively managed, they typically have lower fees than actively managed funds. Index funds are also more tax-efficient than actively managed funds.

On top of that, index fund investing is a simple and convenient way to invest. Investors can choose an index fund that aligns with their investment objectives and risk tolerance.

They can then let the fund do the work of selecting and managing the underlying securities.

Index fund investing can be a good strategy for some investors who are looking for a low-cost, diversified investment that tracks the overall market.

However, it may not be suitable for all investors. It is important for investors to carefully consider their investment objectives and risk tolerance before choosing this strategy.

Strategy 4: Dividend Investing

Another popular investment strategy is dividend investing. It involves buying securities that pay dividends (regular payments made to shareholders).

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Dividend-paying stocks can be a good choice for investors looking for a steady stream of income, and also for those seeking to balance out the volatility of other investments in their portfolio.

There are several factors that investors may consider when evaluating dividend-paying stocks. These can include the dividend yield, the dividend growth rate, and the payout ratio.

In addition to stocks, investors can also consider dividend-paying mutual funds, exchange-traded funds (ETFs), and other securities.

These investments offer diversification and professional management, which is helpful for those not comfortable picking individual stocks.

Dividend investing can be a good strategy for those who are looking for a reliable source of income and are willing to accept the potential risks of investing in stocks.

However, it is important for investors to carefully consider their investment objectives and risk tolerance before deciding whether dividend investing is right for them.

Strategy 5: Growth Investing

In growth investing, investors invest in companies expected to grow rapidly in the future.

This includes companies in emerging industries or those with innovative products or services.

The goal of growth investing is to ride the growth wave and realize significant returns on investment.

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Growth investors typically look for companies that have strong growth prospects.

For example, it could be companies that have a competitive advantage in their industry, a solid financial position, and a track record of growing earnings and revenue.

They may also consider factors such as market trends and the company’s management team when evaluating growth investments.

Growth investing is a higher-risk, higher-reward strategy. The companies in which growth investors typically invest may be more volatile and less established than those in more mature industries.

As a result, growth investing may not be suitable for all investors, and it is important for you to carefully consider your risk tolerance before going for this investment strategy.

Strategy 6: Value Investing

Value investing is an investment strategy aimed at purchasing securities that are undervalued by the market. The goal is to buy low and sell high.

Investors who follow this strategy typically look for companies with strong fundamentals, such as solid financials and a competitive advantage in their industry.

Value investing is a lower-risk, lower-reward strategy since value investors typically invest in stable and established companies.

By buying securities that are undervalued by the market, value investors can realize significant returns over time as the market recognizes the true value of the securities.

Moreover, investing in a range of undervalued securities gives you the much-needed diversification of your portfolio.

On the other hand, companies in which value investors typically invest may experience a different level of growth than those in more speculative or growth-oriented industries.

As a result, your returns may be lower than your expectations. Value investors also miss out on opportunities to invest in faster-growing companies that the market might overvalue.

Consider both pros and cons of value investing before choosing it as your primary investment strategy. 

Strategy 7: Momentum Trading

Momentum traders buy securities that have recently been performing well and sell those that have been underperforming.

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The idea is to capitalize on the momentum of a security’s price movement and potentially ride it to higher returns.

Momentum trading is a higher-risk, higher-reward strategy since it involves taking on significant volatility for potentially higher returns.

There are several risks associated with momentum trading. For example, it relies on the assumption that a security or market will continue to move in the same direction.

Therefore, it is possible for momentum traders to suffer significant losses if the momentum changes unexpectedly.

Moreover, beginners are vulnerable to being caught up in hype or trending markets that are not grounded in strong underlying fundamentals, which is another disadvantage of momentum trading.

If the pros of momentum trading outweigh its cons, it could be the right investment strategy for you.

Follow The Right Investment Strategy To Protect Your Money

A wrong investment strategy can prevent you from reaching your financial goals and keep you wondering why you’re not making any money. 

It’s also important to understand different strategies before narrowing down on the ones that work for you. Use this guide to find the right investment strategy for trading and growing your wealth.