Investing in the stock market is the best way to build wealth if you do your homework and take a long-term approach to investing.
Investors in the stock market can choose many strategies to reach their goal and all involve some degree of risk. How much risk you are willing to take depends in large part on how well you tolerate risk and your age (older investors need to be more conservative to protect their investments against short-term market swings).
The two most common strategies for individual investors are growth and value investing. Each has advantages and disadvantages.
What is the best way to get started investing in individual stocks?
Maybe you already own some individual stocks, but don't have any organized way to approach buying more or perhaps you're just getting started.
If you are ready to start investing in individual stocks in an organized and thoughtful manner, you'll want to develop your own system and strategy.
Growth or Value Stocks?
This article is about your first step, which is deciding if you want to be a "value" or "growth" investor.
There's no rule that says you can't be both, although it may be easier to pick one as your primary focus and most investors usually end up more in one camp than the other.
One strategy is not necessarily better than the other is, although over time value investors have an edge. It is important to note that growth and value investing are not opposites, just different approaches to the same opportunities.
Here is an overview of each so you can begin deciding which strategy makes the most sense to you.
The basic characteristics of growth investing:
- Companies exhibit higher than average growth rates in revenues and earnings, although young growth companies may not post positive earnings for some time
- Companies are in expanding industries that are riding an economic and/or demographic cycle
- Companies typically don't pay dividends
- High growth companies often beat earnings estimates
- Holding period determined by continued growth of company - investors often dump growth companies that report slowing growth
Growth companies may exhibit radical swings in stock prices as investors bid up the price on good news (more growth) and may sell at the first signs of slowing growth. Investors who miss these swings may not realize the results they hope to achieve.
The basic characteristics of value investing:
- Companies may have a history higher than average earnings per share
- Companies that pay high dividends
- Companies in solid, but not necessarily glamorous industry
- Companies are industry leaders
- Holding period typically longer than growth stocks
The critical factor for value investors is to find such a company that is trading well below its intrinsic value. Buying at this price gives value investors the opportunity to enjoy the per share price growth that comes when the market realizes the stock is under valued and begin bidding up the price.
These are not exhaustive lists, but they'll get you started.
For those who are concerned about risk, and everyone should be, of the two strategies value investing is less risky than growth investing.
Not Risk Free
That doesn't mean value investing is risk free, but value stocks tend to be less volatile than growth stocks. However, the danger is you may buy a stock trading below its intrinsic value that never sees the expected growth. You may not lose money, but the stock will not provide the anticipated return over time.
If you lean towards growth investing, you will want to pay attention to current stock and economic news - not to chase hot stocks, but to see where growth in occurring in the market.
If you are a value investor, you'll be paying more attention to the financials using a stock screen to help you find candidates.
Either value or growth is a good place to start, but don't dismiss the other, there are good opportunities in both strategies.