What are the common investing methods?
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There are different options you have for investing in the stock market. Some are simple, and some are a little complicated. Take a look at which investing method would be best for you.
There are three basic investing methods:
- Buy and Hold
- Peso Cost Averaging
- Market Timing (or trading)
Here you’ll learn about each one, and why it works.
1. Buy and Hold
The buy and hold strategy (long-term investing) is buying a stock and holding it until the end of time (meaning, until you want/need to get the money).
This investing method is relatively stress-free, since you’ll be ignoring the daily/weekly/monthly ups and downs of the market. This can be done when you have a sum of money that you don’t really need now or later in the future – but you just want it off your hands. The important thing here is that you’re not attached to the money. If it gets bigger, great! But if it gets lost, then you should still be okay.
Now, I’d like to show you how much money could have been made if we did a buy and hold strategy on these companies. If $100 was invested in 2010, that amount would now be:
- Facebook shares: you now get $520
- Apple shares: now you earn $2.400
- Amazon shares: you earn $3.300
- Tesla shares: you make a profit of $11.302
Compared to short-term investing (trading), the buy and hold method does not require you to have a lot of skills. All you need to do is to research which stocks have good growth potential in the future, then buy and hold for at least a few months to a few years until the stock price is high, you sell it for profit.
With a buy and hold strategy, it’s best to pick the giants of today’s industry. Pick the companies that will most probably outlive you. These are the companies that have a history of expanding into new ways of making money.
2. Peso Cost Averaging
The peso cost averaging is a simple, safe and effective way to make money in the stock market. However, it requires more discipline than the buy and hold strategy. Consistency is very important when it comes to this investing method.
The peso cost averaging strategy is investing a fixed amount of money in a good company at fixed intervals, regardless of its price. This way, you spread out the risk of buying at expensive prices, at the same time take advantage of the opportunities at cheap prices.
Here is an example to show you how this works. Let’s say that we’ve decided to invest in Netflix (NFLX) January 2017. And we’ve set aside $1.000 for investing every six months. This means every January and July, $1.000 will be used to purchase stocks of Netflix, regardless of the price.
The following table shows the prices of Netflix, at six-month intervals. In the table below, I’d like you to notice how the number of shares purchased varies with the price per share.
|Date||Netflix Price ($ per share)||Number of shares purchased *||Total number of shares||Average Purchase Price of Shares ($)|
Because you’re able to purchase more shares when the price is low, the weight of the lower prices is greater. As a result, the average purchase price also goes lower. This is the magic of peso-cost averaging. By buying at fixed intervals, with fixed amounts of money, you take advantage of the price fluctuations.
Peso cost averaging can be a great way to manage your investment risk and keep a consistent investment strategy during all market conditions. It’s a proven way to invest money at normal intervals (monthly, quarterly, etc.) to reach long term investment profits in the stock market.
3. Market Timing
Market timing is also known as stock trading. This investing method means actively watching the stock market for opportunities to buy at the lows, and sell at the highs.
Market timing requires more skill, time, and dedication. At the same time, it is also a lot more exciting.
If you’re willing to check on the stock market daily, and you want the excitement, this may be for you. With timing the market, you can double your money in a week. But at the same time, the reverse could happen. You could also lose half your money in that same week if you’re not careful. This rush of winning and losing is the reason why the stock market is often likened to gambling, very complicated and risky. There are more losers than winners.
While the concept of timing the lows and selling at the highs seems simple, it requires knowledge of science called technical analysis. Technical analysis is a technique where you look for patterns in the stock charts and look for different market indicators. Through the process of trading and learning, you can make money from this harsh market.
Above are three different investing methods for investors can use to make money from the stock market. Each one has its own feature. Hope you can select which is the best for you.