Successful trading strategies can help investors uncover profitable opportunities in the markets. By applying proven stock market strategies, the average investor can take advantage of some of the methods used by professional traders and participate in those gains. Even the most experienced traders realize that investment strategies can fail, however, and that certain techniques work best in specific market conditions.
Growth investing is a successful strategy when companies continue to increase their profits. Instead of using cash flow to entice investors with a dividend, growth companies reinvest profits back into the business to improve operations. In exchange for forgoing a dividend, investors expect that the company's profits and share price will rise. Growth investing is most successful when investors identify companies whose profits are supported by increasing sales.
Value investing is a strategy that seeks to identify stocks that investors appear to be treating unfairly. Investors buy shares and hold out until the market values eventually rise. This strategy is most successful when investors take a long-term approach. Value investing is also most successful when stock market volatility is low. In 2012, following a two-year period of high market volatility and subpar profits from value stocks, volatility subsided and value stocks delivered 13 percent profit.
Shorting is an investment strategy that produces profits in a declining stock market. The method involves borrowing equity shares from a broker, selling them, then purchasing the stock to return it, hopefully after the price has declined. The approach can be challenging for the average investor, but mutual funds have made this strategy more accessible to the mainstream. In 2009, investors had $32 billion invested in long/short mutual funds, which attempt to profit from the difference between rising and falling stock prices.
Income investing is especially compelling when economic conditions are uncertain. This was the case in 2012, when stock market performance was erratic and bonds were paying paltry yields. As a result, investors directed more than $13 billion into dividend stock funds, where they could rely on the steady flow of income, according to a 2012 Market Watch article. Investors earn the best yield, or returns, from companies whose consistent dividend is complemented by a stock price that rises over time.
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