| Secrets to Growth Investing and Value Investing |
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| Written by Michael Swanson |
| Wednesday, 01 July 2009 09:56 |
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I know you want to generate capital gains in the stock market. You need to use a strategy that fits the current market environment and your own personality to do that.
I know you want to generate capital gains in the stock market. You need to use a strategy that fits the current market environment and your own personality to do that. There are two ways two make money in the stock market everyone talks about, but you will be a lot better off if you combine the two of them. I'm talking about growth investing and value investing here. You know buy when it goes up or buy cheap and sell high later. Combine both. The growth investors buy in stocks that go up and go up more. What makes the stocks keep going up is the fact that the companies they represent have big earnings growth. The companies got new products or are run better than their competitors and build market share, which translates into a rising stock price. Even though growth stocks tend to outperform the rest of the stock market during bull markets, growth stock investing holds special risks. Part of the reason why growth stocks do so well is that their earnings tend to surprise analysts to the upside. That catches the attention of investors and causes traders to buy the stock in hopes that the company will surprise again, causing the stock to become highly valued. This always happens at some point with growth companies, because nothing can grow forever. Even Wal-Mart had its growth slowdown. When that happens the stock almost always stops going up and if the end of the growth takes people by surprise it can fall very hard. Because growth stocks tend to be highly valued they are susceptible to large and sudden drops on any negative news. An earnings warning or statements from a CEO that earnings are going to grow at a slower pace are enough to crush investors. Strategies based on growth stock investing do not tell investors to sell until it is too late. The other way that is popular to invest in the stock market is called value investing. Think about Warren Buffett right here. Buffett likes to buy stocks that he thinks are at a cheap price and doesn't buy when the stocks go up. He buys when they are down, by buying stocks he thinks others are selling at a low price for a mistake. Most value investors look for companies whose stock is trading at a very low valuation due to a temporary market condition, such as low sales, a slow economy, or an extreme bearish sentiment in regards to the company that is unwarranted. Sometimes a value investor has to wait a long time after buying a stock to see it go up, because the public stays scared and doesn't see the value in the stock. This can even happen in whole markets. Gold and commodities stayed at low prices until only a few years ago for example. Value investing strategies usually do not do as well as growth strategies in a bull market, because growth stocks go up more. But they are the best way to get in cheap and sell at a big gain. It can sometimes just take more time than most people can wait for. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. For more articles from Mike Swanson sign up to his stock strategies weekly newsletter. |