A stock market strategy is a set of rules by which a trader or investor enters into transactions on the stock exchange . These rules help you choose assets to buy or sell, determine the best entry point, and calculate your position size.
Examples of profitable investment and trading strategies
- buying shares with large dividends ;
- medium-term trend trading;
- investments in developing companies with undervalued stocks.
Of course, the list of investment or trading strategies is not limited to these examples. The number of investment and trading systems is in the thousands, and every day traders and investors come up with new ways to make money on the stock exchange. The good news is that most strategies are based on classic schemes, which we will look at in detail in this article .
People who are not familiar with the realities of the stock market usually imagine the work of an investor as a series of sudden insights. A few successful deals made thanks to market instinct – and now yesterday’s newcomer is already becoming a star on Wall Street.
In reality, trading and investing on the stock exchange does not look like this at all. Any successful investor or trader is guided by a clear strategy – dry, precise and devoid of any emotions.
A trading strategy allows you to systematically enter into profitable trades – and this is exactly what distinguishes a professional from an amateur . Only those who adhere to a clear trading system can make stable money on the stock exchange.
- the time during which the transaction remains open;
- marginal profit and acceptable risk;
- criteria for selecting securities for purchase or sale;
- specific moment of entry into the transaction;
- conditions for closing a position.
In addition, the strategy allows you to track and correct errors . By concluding transactions according to the same rules, an investor can see the weaknesses of his trading system and adjust his approach to working on the stock exchange.
Without a clear strategy, trading on the stock exchange turns into chaos. The trader’s decisions become random so that he no longer sees systematic errors. Without rules and restrictions, a trader breaks into trading on emotions, which inevitably ends in failure.
It is possible, but they must be clearly separated from each other. In this case, each stock trading strategy maintains its own transaction statistics. If you dump all the results in one heap, they will not be able to analyze in the future.
Note that most traders and investors end up sticking to one particular strategy. For a human, this is quite natural: we discard the excess and choose the most effective set of rules that suits our trading style.
Trading and investing have the same goal – making a profit. However, the approaches of traders and investors to the market are markedly different.
An investor buys shares, planning to profit from the growth in their value or dividends. As Warren Buffett aptly put it, an investor thinks not like a speculator, but like a business owner. The holder of any number of shares actually becomes a co-owner of the company, interested in its sustainable development.
A trader trades on the stock exchange, relying only on price movements. He doesn’t care too much about the fate of the company or industry, although he may use this data in his analysis. The main role is given to specific price fluctuations.
- planning horizon . Traders hold a trade from a couple of seconds to several months, although there are exceptions to this rule. Investors calculate the result of their actions for years to come.
- Deal direction . A trader can earn not only on price growth, but also on its fall – for this, you can make an uncovered sale (short) or buy a put option . The investor earns only on the growth of the price of securities.
- Attitude to an open position . The trader tries to clearly define the moment of closing the transaction. For an investor, this is not so important – if a company grows in value, develops steadily and brings good dividends , why not keep it in your portfolio? Such a difference in approaches is sometimes formulated with the phrase: an investor buys to hold, and a trader to sell .
- Analysis Tools . Traders often resort to technical analysis, which allows them to predict the price of an asset from its chart. For an investor, the main role is played by fundamental indicators – financial statements of companies and multipliers.
However, traders and investors cannot be called monolithic groups. Behind these definitions are many small sub-groups, each of which pursues its own goals and adheres to a specific style of trading.
Strictly speaking, not all traders engage in stock speculation for direct profit.
According to the purpose of trading, traders can be divided into the following categories
- Speculators . The most famous category of traders who earn on exchange rate fluctuations.
- Arbitrators . Essentially the same speculators, only less risk-averse. Sometimes the price of the same asset on different exchanges differs, which creates the opportunity to buy it cheaper and immediately sell it at a higher price. The arbitrageur makes money on such anomalies.
- Hedgers . Such traders do not make money on the stock exchange, but insure their business against risks – as a rule, with the help of futures and options . This category includes large banks and insurance funds, industrial companies, and farmers.
- Agents (performers) . They do not own their own capital, but only fulfill the orders of clients – for example, banks.
Further in the article, we will mainly talk about speculators, and also touch on the topic of arbitrage. Hedgers and agents do not make money on the exchange directly, so these roles are not very interesting for an independent trader.
- High-frequency traders (HFT). These are not traders, but owners and developers of high-frequency trading robots . Programs can close deals in a fraction of a second and operate with huge capital. High-frequency trading is the lot of large funds; for a private trader, such a strategy is useless.
- Scalpers (pipsers). They conclude a large number of transactions lasting from a few seconds to 10-15 minutes. This trading strategy is called scalping .
- Day traders. They can hold a position for up to several hours, but they always close the deal at the end of the trading day. Such trading is also called an intraday strategy (intraday).
- Positional or medium-term traders. They make transactions lasting up to several months.
Our classification would be incomplete without a division into bulls and bears.
- Bulls – open positions to buy and earn on the growth of the rate.
- Bears are engaged in short selling and profit from falling prices.
Note that the division into bulls and bears is rather conditional: the same strategy can allow both the purchase and sale of an asset according to similar rules. The conversation about bulls and bears is usually conducted in the context of specific events in the stock market.
- Institutional – legal entities. They can manage both their own funds and other people’s capital. Institutional institutions include banks, pension funds, investment and insurance companies.
- Individual (private) – individuals who invest their own capital on the stock exchange.
- Independent – dispose of capital at their own discretion and conclude transactions on their own behalf, without resorting to institutional intermediaries.
- Non -independent – transfer capital to the management of more experienced market participants (usually institutional investors). Do not make independent trading decisions.
Finally, investors can be divided into several categories in relation to risk.
- Conservative . For such investors, the reliability of investments is above all. They are ready to risk only 5-7% of their capital, but at the same time they agree to a small return close to the inflation rate.
- Moderate . Agree to risk 10-20% of capital, but count on a relatively stable return that exceeds inflation.
- Aggressive . Willing to risk a significant portion of the portfolio in exchange for a double-digit percentage return.
- Speculative (extremely aggressive) . The risk approaches 100%, but the potential profit reaches at least the same values. This category includes venture investors – people who invest in startups.
Note that the same investor sometimes belongs to several categories at once. For example, a client of an investment fund may invest in two strategies: conservative and aggressive.
All investment strategies are united by a fundamental approach to market analysis . When choosing securities for purchase, an investor studies the state of industries and companies, gets acquainted with financial statements, and also takes into account general economic trends.
The specific stock selection strategy depends on the reward/risk ratio, investment objectives, and the knowledge and experience of the investor. At the same time, almost all approaches involve diversification – the purchase of several securities to protect against risk.
We list the most popular investment strategies in the stock market, which are followed by most successful investors.
- Portfolio strategy (Asset Allocation) . The investor forms an investment portfolio in which a significant share is given to reliable securities. At the same time, it is not necessary to abandon risky investments – however, the higher the risks for an asset, the smaller its share in the portfolio. In general, portfolio investment is the best investment strategy for beginners.
- Buying an ETF is buying shares of an exchange-traded fund , which is essentially the same investment portfolio. The difference is that now it does not need to be compiled independently.
- dividend strategy . An investor buys shares in companies that pay large dividends to shareholders. At the same time, the growth of the share price fades into the background.
- Investments in IPO . Purchase of shares at the stage of initial placement on the stock exchange .
We will discuss each of these approaches in detail below. But before moving on to the nuances, let’s analyze the basic principles of stock analysis – after all, the success of any of these strategies depends on this.
How to choose stocks to buy
The primary selection of shares is always carried out from the general to the particular.
Before jumping into specific stocks, it’s helpful to look at the overall health of the economy and answer a few questions.
- Are the markets rising or falling? What factors affect this and how long will they be in force?
- Which industries are gaining an additional advantage in the current situation, and which are the losers?
- What are the economic forecasts for the investment period?
The value of forecasts should not be overestimated: the economy is too complex to take into account all the factors. But even a cursory analysis of the situation will help to avoid frankly failed decisions – and this is already half the success.
The information in this section is relevant for both the US and Russian stock markets . However, it is more convenient to explain the meaning of specific concepts using data from the USA as an example, since they are better structured and most universal.
Selection and analysis of industries
Securities on any exchange are divided by industry – and this is a good help for analysis. When buying shares of a company, we rely not only on its development, but also on the general state of the industry.
Typically, investors try to put stocks from different market segments in their portfolio. This is a reasonable approach that allows you to diversify risks.
- Prioritize industries that you understand . At the same time, the word “understand” can be interpreted very broadly – for example, most people have a basic understanding of the work of retail, simply because they go to the grocery store. Peter Lynch, the most successful manager in US history, often acted on this principle. “Invest in the stocks of stores you visit every day,” says Lynch.
- Don’t chase “trendy” industries , such as IT or alternative energy. Within reasonable limits, such investments are useful, but remember: promising markets do not always live up to analysts’ expectations.
- Tie industry perspectives to specific time frames . Electric cars were predicted to have a great future back in the 20th century, but in reality, the commercially successful Tesla appeared only a few decades later.
- Healthcare (Healthcare) is the most unpredictable industry in which a lot depends on regulatory authorities and the results of clinical trials. Even experienced investors rarely turn to medical stocks .
After analyzing the industry, you can proceed to the selection of specific stocks.
Where to find information about company shares
Our goal is to collect as much useful data as possible while spending as little time as possible searching.
- Stock screeners . They collect many technical parameters and multipliers in one place. The most popular service for foreign stocks is Finviz . Information on Russian stocks can be found on TradingView .
- Official websites of companies. Here you can find audited financial statements and other useful information for investors. Usually this data is published in the “Investors” section.