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Mar 26

3 Key Investing Strategies for Newcomers

Reading Time: 4 mins

If you are new to the world of investing then there’s a lot to learn and the best place to start is by understanding the different investment strategies that are out there.

Now it’s important to note that different strategies suit different people, and some are suitable for different stages of your life. 

For example, if you are in your twenties you may want to pursue an aggressive growth strategy but someone in their seventies may prefer an income based method, so selecting the right strategy is as much about understanding where you are rather than the mechanics of investing.

So check out these 3 different methods of investing and see which is right for you.

 

Buy and hold

This is probably the most used by the casual investor and it relies upon buying shares that you think will do well over the medium to long term.

It’s the strategy used by investment guru Warren Buffet and so there must be something to be said for it!

Buy and hold investors aren’t interested in the day-to-day movement of their shares as they know that over time, they will do well.

The essence of the strategy is to choose shares that have good underlying fundamentals and that are underpriced. Although that might seem obvious, it’s not the strategy followed by trend or day traders who look for shares that have a lot of trading volume and that show potential for short-term gains.

For the new investor, the attraction is that buying a stock for the long term will allow you to share in both growth and income so that you can see how a single stock will fare over time.

Of course this isn’t the most exciting investment strategy and there’s not a huge amount to do, but if you choose well then you will find that your portfolio is more likely than not to show healthy gains.

The key to a good buy and hold strategy is to do intensive research on a few likely prospects and get to know them. Understand what makes them tick, what the outlook for their sector is and when you do buy, forget about them.

The key here is the long-term nature of the investment and a well-diversified and chosen portfolio will nearly always outperform the market.

 

Small cap investing

For a more aggressive investment strategy, small-cap investing is a viable option.

The basic theory is that companies that have a smaller value (hence small capitalisation) will tend to go unnoticed and whilst the big boys like Johnson & Johnson and Tesla are overpriced, the small caps will have value built-in.

The small cap market tends to feature shares that have a lower price per share (often pennies) and there will be much less in the way of volume however when they win, they win big.

Small caps are more volatile and this is where the potential profits come from but this volatility comes at a price, with big swings either way. This means that for the unwary investor, a small-cap share can tank just as easily as it can take off.

Small cap investing is one for that part of your portfolio that you are prepared to lose and that you want to have a bit of a ‘flutter’ with.

That’s not to say that it is completely random or up to chance – in fact there are professional investors that make excellent money by investing in small caps – but it does mean that you do need to spend extra time researching your potential buys.

 

Paper trading

This is possibly the most useful trading strategy for the new investor and importantly it doesn’t involve any risk at all.

Paper trading is simply the way to describe a form of test account that you can set up at any reputable broker and whilst it isn’t a ‘strategy’ in the strictest sense of the word, it is an ultra-important tool in the armoury of the new investor.

When you set up a broker account you will usually be offered the option of setting up a paper account. These have a variety of names, such as test, simulator or virtual, but they all do the same thing.

A paper trading account allows you to test out your theories around investing without risking any real money. This is incredibly useful for the new investor because if you do make a mistake then you aren’t going to regret it.

Don’t think that there is anything embarrassing about using a paper trading account though. All the best traders use them from time to time to test out variations on their strategies and to benchmark their own performance.

Of course the biggest drawback to a paper trading account is that you don’t actually make any money but that really isn’t the point. The idea behind using this form of trading simulator is to make sure you are confident in using the platform, understanding shares and physically making a trade before taking the plunge.

There is one other point to make about paper trading and that is around the emotions of investing.

If you aren’t risking any real cash then you don’t experience the same level of emotion as when you are sitting on real-world positions, so be aware that you may be the best paper trader in the world, but life can actually be very different when there’s cold hard cash involved!

 

Education is the key to profitable trading

You don’t need to go far on the web to find people who will tell you how much money they have made from investing in shares. You’ll usually find them pictured standing in front of a flashy red car!

But the truth is that smart investors don’t become billionaires overnight. In fact they take time to understand the markets, develop their own strategies and then test them using paper trading.

The best way to become an excellent investor is to suck in as much knowledge as you possibly can about trading. 

Check out reputable investment sites and learn the terminology. Join forums to speak with other investors and learn from their experiences good and bad. 

Above all make sure that you have fully understood the way things work and you have a clear plan of action. In short, education really is the key.

Good luck with your investment journey.

*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.

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