If you’re looking for an investment strategy, new ideas, or if you’re just starting out in developing your portfolio, these are some of the opportunities that many people are taking advantage of. There will be a summary of each strategy and subsequent articles that go more in-depth on each of these categories will follow. These are just some of the ways you can find good stocks to invest in.
This method involves finding undervalued stocks that have good fundamentals. The best investments will be those with solid financials, good leadership and a wide competitive edge. The most famous value investor and arguably the best in the world is Warren Buffett.
He finds companies that have a good solid business model and ones with a competitive advantage over others’ in it’s industry. Then he does a valuation of thecompany based on his own criteria. If his valuation is higher than what the market is giving it, then he buys the company. The basic essence of this method is simple. Find good companies that aren’t being given credit for it yet.
This strategy seeks to find stocks with a hot growth potential. This would include technology companies with patented and industry disruptive innovations that are hard to duplicate. It would also include scientific companies who’s research and development department is coming up with hard to reproduce discoveries.
Growth investors also look for companies that have a good potential to be acquired by another company. This would include companies that were started for the sole purpose of being bought up by a larger, well-capitalized company. It would also include companies that would even be acquired through a hostile takeover. This scenario would be ripe for the stock to spike.
Needless to say, growth strategies can be a little more risky because it primarily looks at stock price rather than the fundamental business of the company. It is also tailored more for investors that tend to look for short term profit taking opportunities.
Investors can also opt out of doing the stock picking themselves and invest in a mutual fund. This strategy allow you to entrust their money with an experienced money manager to allocate your capital.
For the privilege of allowing a money manager to invest your cash, you have to pay a fee. The management fee is based on the expense ratio, which is the percentage of the value of the fund that goes to operations and overhead such as administration and salaries. There may also be a fee that goes on top of the expense ratio. Those without this extra fee is called no-load funds.
There are many types of mutual funds. You can find those that do value investing as their approach. And you can also find growth funds that seek follow the growth investing approach.
Actively Managed Funds
There are two types of mutual funds. The first and most recognized kind is the actively managed fund. This category of mutual fund has a money manager, or team of money managers, that actively seek out stocks to put into their portfolio.
Based on their approach and criteria, they go out in search of good companies to buy. Some, like many hedge funds out there, also use very sophisticated stock market trading strategies to make money for their clients.
Many keep communications with the companies they buy and they even have regular conference calls for these managers and analysts. Some go as far as visiting the companies’ operations on site and in person.
As can be expected, the expense ratio and thus the management fees tend to be higher for actively managed funds. Obviously it takes a lot more work and expenses to manage a fund this way.
Passively Managed Funds
Alternatively, you can also invest in passively managed funds. Typically these are index funds that track a particular stock index, like the S&P 500 or Dow Jones Industrial Average. By letting these indices pick your stocks for you, not only are you saving a ton on operational expenses, but you are also tracking composites that have historically proven to rise over time.
The expense ratio and fees for a passively managed fund is a lot lower than for those that are actively managed. Oftentimes it’s not even a real human being who’s putting the stocks in the fund. Many times it’s a computer that automatically invests the fund according to whatever index they are following.
Exchange Traded Funds – ETF
Another vehicle that has grown in popularity, with good reason, for the last few years are exchange traded funds, also known as ETF’s. ETF’s are like mutual funds in that they are a basket of a variety of stocks. But they are unlike traditional mutual funds in that they are traded as shares on the stock exchanges just like any other stock.
There are several advantages to ETF’s which account for it’s rise in popularity. First of all, because ETF’s trade like shares on the stock exchange, you don’t pay a management fee to own it. All you do is pay your usual commission to your stock broker or online broker.
Secondly ETF investment approach allows you to buy and sell shares during normal trading hours. With mutual funds, you are only allowed buy into them once at the end of the trading day. ETF’s allow you to react to market changes that might affect the stocks in your basket.
Many companies that offer mutual funds are starting to offer ETF’s that mirror their mutual funds. For example, the Vanguard Small-Cap Value Index Fund has a corresponding ETF called the Vanguard Small-Cap Value ETF.
Another benefit is that you can trade entire sectors with it. For example, if you are green and like alternative energy companies, you can invest in a natural gas ETF to cover the entire sector.
Investing by Market Capitalization
Here is a quick stock market for beginners overview of market cap. Market capitalization, also known as market cap, is the measure of the size of the company. It tells you how much the market thinks the company is worth as a whole. The market cap is calculated by taking the share price and multiplying it by the number of outstanding shares. There are generally three major categories of cap-size, small-caps, mid-caps and large-caps and an investment strategy that follows each one.
Small-caps are companies worth less than $2 billion. These smaller companies tend to be more risky and volatile in it’s share price, but it also has the most room for extraordinary growth and returns.
Mid-caps are companies worth more than $2 billion, but less than $10 billion. As the name might indicate, the risk and returns of mid-cap stocks tend to be moderate. It is less riskier and with less room for growth than small-cap stocks.
Large-caps are companies with a market cap of more than $10 billion. These are giants like Exxon Mobil, Coca-cola and Walmart. These companies tend to be less risky. In fact, investors flock to them during times of economic crisis as a safe haven for their money. But like this would suggest, large-caps also have the least amount of room for spectacular growth.
None of these strategies don’t have to be stand alone. These general strategies can be mixed and matched to come up with a comprehensive approach. You can invest in a growth fund that focuses on small-cap companies. Or you can invest in an index fund that tracks the S&P 500, which would mean investing mostly in large-cap companies. Or you may want to invest in an ETF that picks mid-cap companies with a value investing approach.
In fact, a multiple combination of these strategies should be used in a diversified portfolio. A financial advisor may be able to give you the investment advice you need to tailor a strategy that fits your needs and life circumstances. There are an endless number of alternatives and options when it comes to investing. I hope this will get you started on the right track to develop a portfolio that is right for you.