Two key factors for a successful investing strategy are applying it with consistency and good money management. There are many stock market investment strategies and new ones are being created all the time; finding one that fits in an investor’s budget and objectives is important. Buying 100 stock shares at a time can help keep an investor on the budgetary track, as well as, help to lessen the sting of a falling stock price. Using methods or strategies consistently is also necessary when trying to build a diversified portfolio of stocks.
When investors and traders buy and sell stocks a group of 100 shares is commonly known as a block. The reason for this is convenient math for share calculations if nothing else.
A rather methodical investment strategy known as Dollar-Cost Averaging is used by many investors to smooth out the bumps and dips
that the stock markets experiences, and at the same time stay within an investing budget. A set amount of cash is invested at regular intervals regardless of how the stock market is performing. If market prices are high fewer shares are purchased than when they are lower. This helps an investor invest in the stock market with the discipline that is necessary for most strategies to be successful.
A similar result could also be achieved by investing in one block of stock at regular intervals. The relationship of the number of shares purchased to the amount of money spent would be reversed. When market prices are high a block of stock would cost more than when they are lower and would produce an arithmetic average price that is less skewed than the results of the first method.
Investing in an individual stock can be very profitable and there are many strategies to choose from. It’s difficult to pick which companies will soar to new heights and which ones will actually languish or take a dive into the basement, but one thing is sure, none of them are foolproof. Some common strategies are value investing, growth investing, income investing, and Dogs of the Dow. A stock screener can be very useful for picking stocks that adhere to a particular strategy’s criteria.
Value Investing is basically dredging the bottom of the barrel for the stock of companies that the investor believes are undervalued. Different investors have different ways to determine a stocks intrinsic value (its true value) for a comparison to the current price. What it all amounts to is trying to buy low and eventually sell high. Many of these companies could be distressed experiencing some temporary one-time problems, such as, negative news releases, or regulatory or reporting difficulties with the Securities and Exchange Commission (SEC). Whatever the reason happens to be, the gist of this strategy is to try to cash in on the woes of a troubled company with hopes that its fortunes will take a turn for the better.
High-Growth Investing is picking stocks that are flying high based on market expectations that it will just continue to rise. These kinds of stocks can deliver high returns on an investment as they outpace the rest of the market, but can also fall the farthest if some expected events fail to materialize as anticipated, or not at all. Imagine a company’s stock riding high on the wave of the recent release of a new state-of-the-art product. Then very soon after that a competitor releases a product that makes theirs obsolete and they’re left trying to find some way to regain their lost share of the market. The stock price falls. Something less dramatic would be a quarterly earnings report that fizzled compared to expectations.
Income Investing utilizes methods that help an investor find stocks that pay dividends to provide an income. These stocks tend to be less volatile than most others while still providing some degree of growth. Payout ratios using the actual cash available for paying dividends like funds from operations (FFO) or free cash flow (FCF) can vary from 20% to as high as 80%.
Dogs of the Dow is fairly uncomplicated and has proven to be successful since 1972. An investor just buys 10 of the highest dividend paying stocks from the Dow Jones Industrial Average and adjusts his portfolio each year to maintain the selection. Something to watch for is that so many people chasing just a few stocks can affect their prices.
Investing in Funds
Using an investment strategy 100 shares at a time for an individual stock can be quite profitable with the right stock but the exposure to various risks is great. Investors attempt to lessen this by selecting a number of stocks to create an investment portfolio with enough market diversity to offset market losses with gains. Hopefully, they will receive profitable returns over the course of years by investing
for the long term. Trying to do this by buying 100 shares of stock at a time can be quite time consuming. Just the research involved trying to pick them can take quite awhile. Investment portfolios commonly have 20 or more stocks in them to achieve a good amount of diversification.
Investing in mutual funds or exchange-traded funds can achieve a high degree of investment diversity with a small investment. Each of these funds has a manager who maintains the portfolio’s investments based on a specific investment strategy. Together these types of funds have providers that number in the hundreds offering thousands of funds. They each have fees and charges for such things as fund management, accounting, load charges (sales commissions), and administration. Actively managed mutual funds have higher charges than the more passively managed exchange-traded funds that just track a broad market index. The way that they are traded is different. An investment in a mutual fund is transacted directly with the fund company while ETF shares can be traded on the secondary market like stocks. Some of the larger mutual fund providers are Fidelity Cash Reserves (FDRXX), and Vanguard Prime (VMM;Inv). Some of the larger ETFs by net assets are, SPDR S&P 500 (SPY), iShares MSCI EAFE (EFA), and iShares S&P 500 (IVV).
Following an investment strategy 100 shares at a time can be a very sound way to invest when the budget constraints must be observed and it makes share calculations easy. Buying shares of stock in one company using a stock picking strategy is one way to invest in the stock market but exposure to various risks is high. Building a diversified portfolio is an effort to lessen the risk, but buying 100 shares at a time is slow going and broker commissions must be considered. Another way to achieve investment diversification quickly is to invest in mutual funds or exchange-traded funds. These have fees and charges that vary between funds and an investor should do some shopping around before investing in them.
Michael Schmidt, CFA, Using ETFs To Build A Cost-Effective Portfolio, http://www.investopedia.com/articles/exchangetradedfunds/09/etfs-and-mutual-funds.asp
Sheyna Steiner, Building blocks for successful investing, http://www.bankrate.com/finance/financial-literacy/building-blocks-for-successful-investing-1.aspx
Motley Fool Staff, Investing Strategies: High-Growth Investing, http://www.fool.com/investing/beginning/investing-strategies-high-growth-investing.aspx?source=isesitlnk0000001&mrr=0.13
Motley Fool Staff, Investing Strategies: Value Investing, http://www.fool.com/investing/beginning/investing-strategies-value-investing.aspx?source=isesitlnk0000001&mrr=0.33
Two dollar bill (obverse), Wikimedia Commons/Conscious
Two dollar bill (reverse), Wikimedia Commons/Clindberg