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Stock Investment Strategies
Investing without a stock investment strategy is like searching for a treasure without a map. The correct stock investment strategy should not only define your investment methods, but will allow you to achieve your financial goals within your specified timeframe.
Four factors that determine your stock investment strategy
- Goals - The total amount of money you will need to accomplish your goals.
- Timeframe - The length of time until you need to achieve your goals.
- Risk level - How much risk you are willing to take to achieve your goals.
- Return level - What returns you are you expecting to achieve on your investments.
If you don't know what your financial goals are take a moment right now to write out where you want to be financially in the future. You may want to retire early, pay for college or just live more comfortably. Make sure to attach a dollar amount that indicates how much you need for that goal along with a timeframe you would like to achieve that goal. We all have important goals in our lives that we need to take into consideration when we create a stock investment strategy.
The amount of time that is available to achieve any goal is very important. Simply put if you don't have enough time to achieve your goal based on your current return then you will need to adjust your return, decrease your goal or make your timeframe longer. Having a shorter timeframe can put you into a different stock investment strategy than what you were initially thinking.
Certain goals can be very aggressive for a specific timeframe and that can lead to your risk level being higher than what you would like, but have to have in order to achieve those goals. There is a correlation to risk vs reward in investing and making sure that the higher risk can result in a reward high enough to justify a temporary setback with a losing stock investment.
The return level that is needed to achieve your goals based on your timeframe might not always be what your expecting. If your timeframe is shorter than what you would like to achieve your goal then your returns will have to compensate for the shortcoming. This can sometimes result is a higher risk level than one might be used to.
We have a great online calculator that you can access here investment tools that will help you understand the relationship between your goals, timeframe and returns that are required to reach your goals.
Two basic methods of analyzing stocks
Now that we've touched on a few important questions to ask yourself we can get started with more details about the different stock investment strategies. Stock investment strategies can be split into two main methods: fundamental analysis and technical analysis.
Fundamental analysis is that the stock market can incorrectly price stocks, but eventually the correct price will be obtained through time. The focus is in finding these undervalued companies and purchase them. In turn, they sell the stock when the stock is fully-valued or even over-valued.
Technical analysis rely on charts and indicators that revolve around price and time such as moving averages, volume and relative strength of stocks just to name a few. There are way too many stock indicators to name them all here.
Each type of stock investment strategy analysis has it's advantages and disadvantages. There is no clear winner as to which method is the best. It boils down to your own belief more than the system. It's about what you feel is a valid reason to buy a stock. If you don't believe that a low PE ratio is a strong enough reason to buy a stock then you should not be using that type of system.
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