Candlestick Trading Blog

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Investment Philosophies – Shaping Your Future
It seems like developing an investment philosophy is automatic. No one would venture into the stock market without a clear understanding of what they want to accomplish and how they are going to do it. Yet surprisingly, many people do not have an understanding of this stock investing concept. It is important to look at how you want to make your money and most times, your investment philosophy falls into three main categories: growth investing, income investing and value investing.

Growth Investing
As the name implies, growth investing is the investment philosophy of looking for the big winners in the stock market. Growth investors are looking for companies that possess a high potential for growing earnings. In theory, high growth equals high stock prices and in turn, high profits. People involved in growth investing take their risks wagering that young, upcoming companies will break through and become leaders in their industry. Google stock is a perfect example of a growth stock, as were technology stocks in the 1990’s.

Many companies that fall into this investment philosophy started with a dream, an idea and nothing else. They were able to overcome the obstacles and become strong profitable companies. Most of the companies in this investment philosophy look like rising stars until reality sets in and they turn out to be falling stars instead. This investment philosophy offers risk reward ratios that are quite drastic. While the rewards can be very high in growth investing, the risks are higher as well.

Income Investing
Income investing is the most conservative and easy to understand investment philosophy. Income investors target companies that consistently pay high dividends. This is one of the preferred stock market strategies for those around retirement age. This investment philosophy looks for companies that tend to be large and well-established. As taught in stock market investing 101, there are always risks, but income investing is the most conservative approach. If such a company’s stock increases, the investor can cash in, trading some capital appreciation for a higher dividend.

Value Investing
Value investors look for one thing; they look for stocks that have been overlooked by the market. While this doesn’t necessarily mean they have a low share price, it does mean that for whatever reason, the market has undervalued a particular stock. Many times, a stock gets overlooked while investor chase profits in another related sector or in a company that is in the same sector but is perceived differently by investors. Stock technical analysis is important with such companies since an investor doesn’t want to confuse undervalued with underperforming. A value investor can look at the price to earnings ratio as one guide to the value of a stock. The hope of the value investor is that the market will recognize the worth of the company and its stock will be bid up to true value, realizing a profit for the trader.

All three investment philosophies are viable and valuable to successful traders. It is neither required nor recommended to strictly follow one particular strategy. One of the keys to a profitable stock trading plan is to have a diversified portfolio; one of the keys to having portfolio diversification is to utilize various trading techniques. One of the best ways to shape a profitable trading future is to take advantage of each investment philosophy that is available.