Investment Strategies

You could make a mint following your intuition, but as a beginner it might be worth adopting a tried and tested strategy for stock market investment.

None of the methods we've outlined promise riches overnight. Not all will grab your imagination. But they offer some structure to investing.

The scattergun approach can often cost hundreds, if not thousands of pounds.

Taking share tips from the bloke down the pub will leave you destitute.

Here are some of the more popular ways of investing your hard earned cash:

  • Buy and Hold
  • High Yield Shares
  • Value Investment
  • Penny Shares
  • Pound Cost Averaging
  • Large-caps
  • Thematic Investment
  • Garp
  • Quality Investment

Buy and Hold

As the name suggests, it is a passive way of investing in shares. And it is also low risk.

The idea is you add to your investment much the same way as you would accumulate savings, topping up your portfolio weekly or monthly.

It is a long-term strategy that rests upon the assumption that over the course of say a decade, share prices go up and the wilder peaks and troughs even out.

High Yielding Shares

A well-worn route is to identify shares that pay out a large dividend when measured as a percentage of their share price. Known as high yield stocks, they offer the promise of income as well as capital growth.

Often the yield of a share is high because the share price is depressed. So you might want to ask yourself why that might be.

Often it can be nothing more sinister than a sector being out of favour. But in other cases it could point to underlying problems with a company, meaning the shares deserve their lowly market rating.

The Americans have refined the strategy with their Dogs of the Dow approach. Across here it is the less poetic Dogs of the Footsie. The Dogs in question are the highest yielding bluechip share in the FTSE 1000.

The theory is these stocks offer a reasonably safe investment, a dividend that often beats hands down the current savings rate, while at the same time holding out the prospect of a recovery in the price.

You must be barking...British Airways only yields 3.6pc!
You must be barking...British Airways only yields 3.6pc!

Value Investing

Here you are relying on your skill and judgement to discover where the market got its calculations wrong.

That means comparing the company's stock market valuation - the number of shares in issue multiplied by the price - with the value of its assets, or intrinsic value.

In practice that means identifying companies with low price to earnings ratios (P/Es).

The problem comes when assessing the company's intrinsic value. You will probably look at the firm's assets, earnings, cashflow and dividends.

But investment professionals are divided on what else you should add to the mix. Some only look at present assets and don't place any value on future growth.

Other value investors base strategies completely around the estimation of future growth and cash flows.

Despite the different methodologies, it all comes back to trying to buy something for less than its worth. It renders value investing at best an inexact science and at worst nothing more than guestimology.

Penny Shares - Not for Widows and Orphans!

Generally, they are shares in small, high risk companies.

Strict definition of a penny share is one where the spread between the bid and the offer price (link) is more than 10pc of the offer price.

The holy grail for penny shares specialists is to find a stock that increases in value in a very short space of time.

The bulletin boards are full of people bragging that share X or share Y is a ten bagger - a share that will rise tenfold, delivering a mouthwatering profit.

The truth is very few of these fledgling stocks burst into life in the way you expect and many crash and burn.

By all means invest in penny shares, but always do your research - thoroughly - and be prepared to write off the investment if you get it badly wrong.

Remember with the spread between the bid and offer price being so wide, the share price will have to improve by more than 10pc before you break even.

First Rule of Investment: Always set a stop-loss. Know when to get out. The most common mistake of beginner investors is chasing losses.

Great and Small

If penny shares scare you, then you may consider investing in big companies. Known as large-caps, or blue-chips, they are usually household names.

The 'cap' part refers to the firm's market capitalisations, that is the value of the company. A large-cap company will be worth billions of pounds and reside firmly in the FTSE 100.

British Airways - which is valued at £3bn - is a large-cap company. But in FTSE 100 terms it is a very small large-cap when you compare it with BP, which is worth £130bn.

Shares in large-cap companies are easier and cheaper to trade.

Their performance is usually less volatile day-to-day and they are generally long-established and so unlikely to go bust overnight.

In the debit column, large companies are closely followed and well researched, making it difficult to spot bargains.

Thematic Investing

Over the long-term (decades, rather than weeks and months), companies and industries are shaped by the world in which they operate.

Thematic investment is part crystal ball gazing and part commonsense. A major theme dominating world stock markets today is the price of oil.

A thematic investor may take a view on the world oil price and invest accordingly. Or more likely he or she will look beyond oil - which is a finite resource - and invest in companies specialising in alternative energy.

Sometimes it isn't the large global themes that drive the market. Retailers are swayed by consumer confidence and banks ride the interest rate cycle. Investing in either means taking a view on a single issue.

And there left-field themes such as ethical investments.

The word according to GARP

Garp stands for Growth at a Reasonable Price. And it offers a middle way for people who can't decide whether to invest in shares for growth, or for value.

You would think the two were mutually exclusive, but there is a wonderful calculation called the price-to-earnings growth ratio, or PEG (link to glossary for PEG), that helps identify growth stocks.

Bulls and bears: Bulls are a positive breed and are generally buyers in the market. It's unclear how bulls came by their name, though it takes little to imagine a raging bull flying into the stock market and buying up stock.

Quality Counts

Warren Buffett, the legendary American investor, claims only to invest in quality. The 'sage of Omaha' has amassed his billions by pouring cash into large, good quality household names.

And in many cases he has sat on the stock for years. His large stock holdings have include substantial stakes in Coca-Cola, Gillette and McDonalds.

His definition is not quite as subjective as might seem, but if you want to know more then click this link.

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