The world of investing can be difficult to grasp, especially if you are a new investor. The financial industry has always had a ‘bad habit’ of making its jargons as difficult to understand as possible for you. As such, many people are afraid to think about investing, let alone putting their money in the stock market.
As someone who had experienced that before, we understand your pain and your worries. Thus, we compiled this beginner’s guide to investing strategies to give you an overview of ways you can invest in the stock market. We believe that this will give you the confidence to start investing in the stock market (in the right manner).
Let’s get started with this guide to investing strategies that you can adopt in the stock market
1. Value investing for ‘The Gem Finder’
Value investing is an art that has been perfected by Benjamin Graham, the father of value investing. Benjamin Graham has a strong belief. He believes that the stock market is a voting machine in the short term. But in the long run, it becomes a weighing machine. In layman terms, he means that the stock market is driven by people’s emotions in the short term. Yet, in the long term, the stock market is discerning enough to know that a company’s worth is determined by its earnings capability.
Based on this belief, value investors will go to the stock market to look for bargains that have been overlooked due to people’s emotions. Value investors will then pick those bargains on the cheap and sell them at its fair worth in 1-3 years later. You can think of value investing as the gem finder. The value investor looks for unpolished gems, dust the layer of clouded judgement off and sell them at a high price.
The value investor first estimates the intrinsic value of the company. Then he/she looks at the current price of the company based on the stock market’s last traded price. If the current price is 50% (or less) than its intrinsic value, value investors will buy and hold onto the stocks. The stock will be sold when it approaches his/her estimate of intrinsic value of the company.
2. Growth investing for ‘The Oracle’
Unlike value investing, growth investing is about investing in companies that have potential to be bigger than what it is today. Growth companies grow its’ earnings at a faster rate than most companies in the same industry. This is because growth companies tend to exploit untapped areas of the market or are able to disrupt the current market condition.
Growth investors are like oracles trying to predict the future of the company. Yet, growth investors do not make blind guesses about the company’s future. Through different measures like earnings growth and revenue growth, growth investors will make a calculated bet on how far the company can go. Growth investors will look at the projected earnings in the future and reverse calculate its corresponding worth today. If the current share price is less than its corresponding worth, growth investors will invest in the company.
3. Dividend investing for ‘The Conservatives’
We understand that everyone is different. Thus, not everyone will be willing to take as much risk as growth investors. For the conservatives, there is dividend investing.
Dividend investing is different from value or growth investing as it doesn’t depend on capital appreciation for investment returns. Instead, dividend investing is about investing in companies that pay high dividends to shareholders. Companies that have fast-growing dividends are also considered by most dividend investors. Dividend companies are usually cash cows that don’t have much growth areas to invest in. Thus, instead of letting the cash sit idle in the company, the cash is returned to shareholders.
Key metrics that dividend investors look out for are dividend yield, dividend payout ratio and dividend history. For more conservative dividend investors, a consistent dividend payout of 5-10 years would be the most ideal.
4. Index investing for ‘The Ones Who Want To Chill’
The common perception about investing is that a lot of time and effort needs to be invested in order to make good investment returns. But what if we told you that it doesn’t have to be that way?
Index investing is a passive investing strategy that is usually tied to the returns of a broad market index, e.g. Straits Times Index (STI) or S&P 500. When you invest in indices, you are literally investing in the top companies in the market. For example, when you invest in STI, you are a proud shareholder of the 30 largest companies in Singapore by market capitalisation.
Unlike the other strategies, index investing is very suitable for those who want to chill and take life easy. Despite having to put in much lesser effort than other investing strategies, you are still able to get above average returns.
Ready to start investing?
|Time & Effort||Suited For||Investment Returns||Metrics Commonly Used|
|Moderate to High||Risk tolerant
Want moderate to high returns
|Moderate to high||
|Moderate to High||Risk tolerant
Wants high returns
|Low to Moderate||Risk adverse
Dividend Yield, Payout and History
|Index Investing||Low||Risk adverse
Now that you’ve learnt about the major investment strategies adopted by professionals, are you feeling much readier to invest your money?