Inside the best strategies to make money in stocks

Businessman's hand holding smartphone with a diagram of business strategy drawn on a blackboard.[Courtesy]

Buying shares is one of the greatest investment innovations in the history of man. It allows anybody to own a portion of a business or businesses without getting personally involved in their day to day operations.

With that ownership comes the ability to earn in two main ways - through dividends apportioned from business profits and through capital gains arising from share price changes. While anyone can buy and sell shares, only a few make money in the stock market.

Your style of profiting in the stock market is the one that determines what stocks you buy and at what price and time you buy and sell the stocks. These three (the stock, the price and time) are the ingredients you need to get right in order to succeed in the stock market.

It is possible to get the stock right but buy or sell at the wrong time.  Similarly, it is also possible to get the stock right but buy it at too high a price. These two scenarios amount to risking the loss of precious capital. To get it right, you have to have a style.

Broadly speaking, there are two styles of profiting from the stock market: Investing and trading. Each of these two styles have different offshoots or sub-styles based on what factors one considers most effective in bringing returns.

Issues of profitability, durability and sustainability of the business are of great importance to the investor. Some of the important indicators of business growth that an investor monitors are sales, earnings, equity, cash flow and return on invested capital.  

Investing styles revolve around three key metrics of performance which include dividend growth, value growth and earnings growth rates. These styles are dubbed income investing, value investing and growth investing respectively.

Income investing: An investing style whose strategy involves investing in companies that have a history of giving dividends. Because investors are sure of the dividend being given, they rely on this as a source of regular income.

Value investing: This strategy involves investing in companies that have been undervalued by the market. Positions are held until when the market realizes its mistake and values them correctly.

Growth investing: This strategy involves investing in companies that have a high growth potential, that is, they have an expected earnings growth that is higher than other companies in the same industry or the market as a whole.

Trading style: Trading styles are generally short and medium-term in nature and are more concerned with market dynamics of supply and demand, sentiments and crowd psychology. These aspects of the market are best captured on charts, with the most basic ones being those of price and volume. It is important for a trader, and even an investor, to know how to read these charts because they help a lot in the timing of entry and exit.

Day trading is a trading style in which positions are held for just one day only in an attempt to capture intra-day market moves.

Swing trading is a trading style in which positions are held for a period of days, weeks or even months in an attempt to capture short-term market moves.

Position trading encompasses the longest trading time frame. Traders using this style exploit a combination of technical and fundamental analysis to make trading decisions.

Before you jump into the market, examine these styles and their attendant strategies and see which one suits your beliefs, personality and circumstances.

-Peter Wambu is a stock market expert and the author of The Ultimate Framework for Success in Shares