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Investment StrategiesBefore an investor starts investing, he should cast a carefull thought on what type of investment strategy he should follow. An investment strategy should be chosen based on your risk profile as well as your long and short-term goals. We present a brief overview of the types of investment strategies that an invetor should consider.Dividend stripping is a really fun way to make money in the stock market. Granted, it's never a sure thing, otherwise you could almost guarantee making big money on the market at all times. This is not a new technique. It involves scanning the markets for shares that offer exceptional dividend yields. Then, you find out when the share will be paying its dividend, and buy the share in time to receive the dividend. Now, you may think this is a clever strategy, but bear in mind the market prices the dividend into a share before you purchase it. So, for example, if a share is trading at R10 and declares a R1 dividend, it will slowly rise to R11. On the days the share goes ex-dividend (meaning anyone who buys the share after this date won't benefit from the dividend) the share will usually drop by the value of the dividend. You see, markets are very quick to restore equilibrium. It's near impossible to fool the markets. However, where dividend stripping works really well, is when markets are rising. What happens in this case, is the share will usually drop by less than the value of the dividend, and in some cases will even continue rising. Very useful indeed! Pay It Safe And Invest For Income An income strategy requires a slightly different outlook than other investing strategies. Your focus shifts from potential capital gain to future prospects for dividends. Your goal in this form of investing is to secure a steady income stream by considering shares with high dividend yields. This is an extremely conservative strategy with equally unexciting returns, though you can never discount the possibility of a sweetener by way of capital growth. Have You Heard About 'Dividend' Stripping Dividend stripping is a really fun way to make money in the stock market. Granted, it's never a sure thing, otherwise you could almost guarantee making big money on the market at all times. This is not a new technique. It involves scanning the markets for shares that offer exceptional dividend yields. Then, you find out when the share will be paying its dividend, and buy the share in time to receive the dividend. Now, you may think this is a clever strategy, but bear in mind the market prices the dividend into a share before you purchase it. So, for example, if a share is trading at R10 and declares a R1 dividend, it will slowly rise to R11. On the days the share goes ex-dividend (meaning anyone who buys the share after this date won't benefit from the dividend) the share will usually drop by the value of the dividend. You see, markets are very quick to restore equilibrium. It's near impossible to fool the markets. However, where dividend stripping works really well, is when markets are rising. What happens in this case, is the share will usually drop by less than the value of the dividend, and in some cases will even continue rising. Very useful indeed! Go With The Flow The Momentum Investor's Way A good momentum investor can almost be equated with a professional surfer. You need impeccable timing to time the market just right - and ride the market for just the right period of time. Momentum investors are often known as 'day traders' - because they tend to be in and out of the market so quickly. The secret of being a good momentum investor is to fully understand the market axiom "the trend is your friend". So - higher highs and higher lows (on a particular share price) mean the share is in an upward price trend. Similarly, lower highs and lower lows mean a share is in a downward trend. The trick is to buy stocks on pullback while they remain in the upward trend, and vice versa. It sounds quite rosy, but momentum investing is probably not the right strategy for you. I wouldn't recommend trying this strategy when you first start out because it's too close to the rather less welcome categories of punting, gambling and speculating. The 'Contrarian" Investment Strategy A contrarian investor is someone who goes against the mainstream. If you adopt a contrarian investment strategy then your goal is to make money in the markets by going against the conventional wisdom. So - for instance - you would buy the 'out-of-favour' stock when everyone else is dumping it. In much the same way, you would be a seller of an 'in-favour' stock when too many investors are buying it. A good momentum investor can almost be equated with a professional surfer. You need impeccable timing to time the market just right - and ride the market for just the right period of time. Momentum investors are often known as 'day traders' - because they tend to be in and out of the market so quickly. The secret of being a good momentum investor is to fully understand the market axiom "the trend is your friend". So - higher highs and higher lows (on a particular share price) mean the share is in an upward price trend. Similarly, lower highs and lower lows mean a share is in a downward trend. The trick is to buy stocks on pullback while they remain in the upward trend, and vice versa. It sounds quite rosy, but momentum investing is probably not the right strategy for you. I wouldn't recommend trying this strategy when you first start out because it's too close to the rather less welcome categories of punting, gambling and speculating. References [1]
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