Investing for Beginners: 3 Investment Strategies You Should Know - The Sista Fund (2024)

There are numerous investment strategies out there and it can be pretty overwhelming trying to wade through them all.

That's why we are going to go over just 3 of the main investing strategies that you should know about as a beginner investor.

• Income Investing
• Value Investing
• Growth Investing

Before you dive into investing in the stock market, it is important to determine what your investment strategy will be.

To pick a good strategy, you need to be clear on what you actually want to accomplish through investing. Are you in it for the passive income? Is it all about saving for your retirement 30 years from now?

There are many reasons for someone to want to start investing in the stock market. One of the main reasons being to grow your money and start building wealth.

Your reason for investing will be the biggest determining factor for which investing strategy you will use in the market.

Knowing why you are investing and the goals that you hope to accomplish will make choosing your investment strategy and investing so much easier.

So first things first, why are you investing?

When you invest for income, you want to make sure that every asset you buy will increase the amount of money you receive each month.

There are numerous ways to invest for income. One of them being investing in companies that pay dividends and another being, trading.

If you are interested in building up your portfolio with dividend producing companies, it is best to look for companies who have had consistent dividend growth and a record of always making its dividend payments.

Not many companies can boast of these commendations but among those who can are the Dividend Aristocrats.

The companies that make up the Dividend Aristocrats are members of the S&P 500 who have not only paid their dividend but has also increased their dividends for the past 25 consecutive years.

As of this year, there are 65 companies that make the list and include some well-known companies such as Coca-Cola, 3M, Colgate, Proctor & Gamble, and Johnson & Johnson.

Now, ... what can be better than being a Dividend Aristocrat? Glad you asked.

That would be being DividendKings. Those companies savvy enough to make this list have been consistently paying and increasing their dividends for not just 25 years but for 50!

The perks of investing in these royal companies are that they are reliable and relatively stable with impressive financials. All you can ask for when your end goal is a steady, reliable income stream.

Another way to earn a little income investing in the stock market is through trading. There are a number of ways to make money this way and that can be through trading stocks, options, futures, etc.

To make money trading you have to buy the stock when its price is low. Then sell the stock when its price is high. The key to trading is knowing when to buy and when to sell.

A downside of trading, besides the obvious that you can lose a ton of money fast, is the learning curve and the fact that all this buying and selling means you may be paying a lot of money in taxes.

• Pick companies that are well established with a solid growth history and good future prospects.
• Pick companies that have consistent dividend payouts
• Companies that have a history of increasing dividends such as the Dividend Aristocrats are great companies to consider
• Dividend payouts should be no more than 50% of earnings

Note: It's been historically shown that companies with a Dividend Payout Ratio of about 41% has been the safest. But , remember, these numbers can always change.

Also, when it comes to income investing, don't just go for the company with the highest dividend yield. You still want a company that has strong fundamentals and is going to be around for some time.

After all, what's the point of getting high dividend payouts that last only a few years because the company goes out of business?

For those interested in finding bargains, value investing may be for you.

A kind of investment strategy made popular by Benjamin Graham and subsequently, Warren Buffett, value investing involves finding great companies for bargain prices.

So you'll first have to find a great company. If you are familiar with Warren Buffett's 4 Rules, you'll know that these companies have great leaders, manageable debt, stability, and future growth prospects.

Since value investing is dependent on finding great deals a company's financials will play a huge part. Do they have strong cash flow? How are their earnings, future earnings growth, etc?

You will need this info to determine how much the company is really worth, or its intrinsic value. After all, you want to find a great company that is trading for less than it is actual worth.

But don't get it twisted.

A low price does not always equal a great deal. You don't want to end up buying a bad company just because it is cheap.

So remember to find the good company first. Then determine whether it is selling for a good price.

• The Price to Earnings Ratio should be low when comparing industry averages
• Current Assets should be at least 1.5 times Current Liabilities
• Equity should be at least 2x Debt (Check the Debt to Equity Ratio)
• Share Price should be no more than 2/3 of the company's intrinsic value

Note: While these rules are handy to have for quick checks, it is not the holy grail of value investing and shouldn't be considered hard rules that companies must pass. Nor are they the only rules out there.

As always, remember to do your own research so you can make the right decision for you.

If you dream of becoming one of those famous stock pickers who picks the next Amazon, you will want to hop on the growth investing bandwagon.

Investing in growth companies does indeed come with its risks, as you are solely looking for companies that are on the verge of rapid growth due to a new product, a new, expanding industry, etc.

Many times these companies will be trading at high P/E ratios so these definitely wouldn't be on the value investing list.

Furthermore, these growth companies almost never pay dividends as they are using all of their earnings to fuel their growth. So these are not for the income investors either.

In the end, you are looking for companies that are reinvesting in themselves. Companies with dedicated research and development departments and committed to expansion and growth.

These companies might cost more than they are worth intrinsically but you're not investing in them for their price. You are investing in them for their future growth potential.

So it may not matter what you pay now as long as what you will get in the long run is worth it to you.

• Projected earnings growth of at least 10% preferably 15%
• Historical earnings growth should be between 5% and 12% depending on its size
• Return on Equity should be stable or increasing year after year
• All earnings should be reinvested into the company

Remember growth investing is not value investing. These companies will most likely not have a low P/E ratio and will probably be trading for far more than its intrinsic value.

The question is whether or not they still have far more room to grow. If so, they just might be worth the investment.

As a beginner investor just starting out in the stock market, it is good to have some ideas of the investment strategy you would like to use.

Even more important is to make sure your investment strategy aligns with your overall financial situation and goals.

That is why it is important that you take this time now to figure out how you want your financial future to be. Then you can use your investments to ensure you can create it.

Are you looking for some extra income? Do you want to buy a bargain? Or are you looking for the next Amazon?

What strategy will you use for your financial future?