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Although there are many shades of activity in between, stock investors can be divided into two camps: buy-and-hold investors and market timers. Buy-and-hold investors want stocks that will increase in value over time. They are looking for stocks that have shown a consistent history of revenue and profit growth and are forecast to continue those trends. Income investors look for dividend-paying stocks to hold in the hope that companies will increase their payouts over time. The financial health of the company behind the stock is of primary concern to buy-and-hold investors.
Market timers are looking for repeatable pricing patterns in stocks in the hope that they can buy when the price is at the bottom of the cycle and sell near the peak. Stock timers may hold a stock for just a few hours (day traders) out to several months if they see a pattern. Timing traders are more interested in how specific stock prices react to news and changes in the overall market than they are in the underlying financial strength of the company. -
The criteria for picking individual stocks, especially for longer-term investing, again fall into two broad strategic categories. Growth stock investors look for companies with high rates of revenue and earnings growth that are accelerating. The stocks may trade at high valuations based on their current financial data, but the projected growth should result in even higher stock prices in the future. Growth stocks are often young companies with new products or services that will allow rapid expansion of the business.
Value investors look for stocks in which the value of the assets of the company is less than the market value as indicated by the share price. Value stocks may be companies in market sectors that are currently not in favor with most investors but are still profitable. Value investors must be patient until the market sees the intrinsic value of these stocks.
Contrarian investors look for stocks that the stock market and investors do not like but the contrarian believes the company may soon produce improved results. Contrarian investing works best when the market is driven by fear and drives down the stock prices of good companies as well as bad. For example, investors who bought stocks in March 2009 when the investing public was most pessimistic saw average stock values increase by almost 50% in the next 6 months. - Investors should use stock-picking strategies with which they personally are comfortable but also to be flexible, because the market will reward different strategies at different times. It takes courage to buy when it seems everyone is selling and to sell when the masses are buying. Investors must understand the reasons that they are buying a stock and be ready to sell if their assumptions turn out to be incorrect.
