According to Pew Research, 52% of American families are invested in the stock market, even if it’s just through employer-sponsored retirement plans. When it comes to individual stocks, though, the number goes down to 14% of households who participate. With this in mind, it only makes sense that stock market novices would want to know investing strategies for beginners. Here’s the rundown on swing trading, short- versus long-term trading, dividend investing and more.
- Investing strategies for beginners can help mitigate risk of loss and provide a basis for what to expect in your investments.
- There are numerous investing strategies, and you need to find the right one for your specific financial goals and risk tolerance.
- Swing trading involves buying and selling stocks over the course of 5–10 days, selling when your returns are about 5–10% and putting a stop loss at just -2–3%.
- A difference in financial goals can determine whether you go for short- versus long-term trading.
- Dividend investing can be a safe way to earn gains thanks to a combination of dividend payouts and capital appreciation.
- Small cap trading and value trading are other common investing strategies for beginners.
Why you need an investing strategy
Investing strategies for beginners are beneficial because of the risk involved in the stock market (AKA the chance you can lose money). Factors like the coronavirus pandemic serve to further highlight this risk because of increased volatility in certain market sectors (the largest one-week decline in the stock market since the 2008 financial crisis occurred from February 24–28, 2020). Even if you start small with fractional investing or penny stocks, you’re still vulnerable to that risk.
But risk isn’t just about losing money. It also opens you up to the possibility of monetary gains. Knowing the available investing strategies — and ultimately choosing the right one for you — will help you mitigate negative risk through the use of calculated buying and selling. Knowledge may be power, but it can also be money.
Picking the right strategy for you
Before you select your favorite investing strategies for beginners, it’s worth noting that you’re not always going to trade at exactly the right time. That doesn’t mean you won’t profit. Research and experience will help you hone your selection and timing, and it will also help you learn exactly what the stock charts, earnings reports and other resources are telling you. In addition, you’ll have to pick one that’s suited to your specific financial goals and risk tolerance.
For your educated reference, we’re laying out a handful of investing strategies for beginners that may strike your fancy.
Swing trading is the act of buying stocks for just a brief amount of time (say, 5–10 days) and selling when your returns are at about 5–10%. This is opposed to the 20–25% return you might see people talk about when discussing months-long investing. In the short term, your returns can seem small. But do this consistently and you can see your returns compound into something more impressive. Investors who practice swing trading cut their losses sooner so they don’t wipe out their small victories. Instead of putting a stop loss at -10%, swing traders may do so at just -3%.
Technically, short-term trading involves any asset you hold for less than a year. However, most investors end up selling after a few months to maximize their profits and protect themselves against extreme market volatility. These assets tend to be volatile and liquid. You may see short-term trading within individual stocks or ETFs. Short-term trading is more active than its long-term counterpart — you’re more involved in the market’s day-to-day fluctuations, staying on top of any changes so you know when to get out. Typically, people seek returns of 10–25%, but this varies depending on the state of the market.
We know that short-term trading occurs for less than a year at a time, but long-term trading involves any asset you hold for more than a year. Realistically, investors usually hold these positions for several years. It’s less aggressive and more passive, allowing for slow yet notable growth. People typically use long-term trading to help them save for their children’s college, their own retirement or other long-term goals. Long-term trading isn’t just your average stock, either — people invest in real estate, passive mutual funds and other entities to help them grow their wealth over time. Investors may expect returns of 10% or more.
Some publicly traded companies pay dividends to their shareholders, so dividend investing is buying shares of a company that practices this. These dividends are based on what’s called a payout ratio, which tells investors how much of the net income a company will shell out versus what it will keep. Experts tend to consider dividend investing a safe bet, as you get returns from both the dividend payout and the capital appreciation. Depending on your preference, you can reinvest your dividends into the company or take them for yourself. Investors may want to look for a high stock dividend coverage ratio (AKA the number of times the company pays out dividends to shareholders), stable cash flow and a lower profit share.
Small cap trading
If you’re investing solely in companies with a market capitalization between $250 million – $2 billion, you’re dealing with small cap investing. In simpler terms, this means you’re investing in startup businesses or young companies who hold the potential for more aggressive growth. You may find this with brands who have recently undergone the IPO process (like Peloton, or soon-to-be Airbnb, for example). Small cap trading is opposed to large cap trading, which focuses on companies with more than $10 billion in market capitalization (think Apple, which is in the stock split process, or Tesla).
For someone who wants to trade individual stocks (whether it be for the potential gains or the thrill of the risk), value trading may be a worthy strategy. Touted by Warren Buffett as the thing to do, value investors focus on companies that may be currently trading at a lower price than the investor thinks they’re worth. Basically, you’re looking for a good deal. Of course, this takes some research — but what better way to become a seasoned investor than diving into fiscal analyses? You can learn about a company’s valuation and projected value by learning to read an earnings report, joining earnings calls and staying up to date on company filings via Edgar, the SEC’s search database of publicly traded companies.
You don’t have to be a pro to start investing, but knowing investment strategies for beginners can be a good stepping stone to get you to a place where you’re seeing real returns. Having a strategy helps minimize the risk that comes with playing the investing game, but it also helps you maintain your footing when things go well. Swing trading, short- versus long-term trading, dividend trading and more offer strategic tactics for folks who need some instruction. Whatever you choose, consider your financial goals — now and in the future — and choose what aligns with your vision of solid wealth.