In this article, we begin to learn about the methods people use to make money in the stock market.
To put it simply, in the previous sections, we learned why we need to learn about this “machine”, the concept and operation of each gear and shaft in the “machine”, how they work individually and how they work together to make the “machine” work.
And in this part, we will learn about how people use this “machine” to make money, that “machine” is the stock market.
The goal of this section is to help you have a general understanding of all the methods that people are using to make money in the stock market. In this section, we will go as broad as possible. In each method, I will share with you the most basic information, enough for you to understand the core of the investment strategies.
We will not go too deep into each investment method because if we go into the details of each method, the knowledge content of each method will be very large, leading to readers being overloaded and confused.
Not to mention that each investment strategy will suit each individual differently, so if we go too deep into a specific strategy, it will lead to boredom and waste of time for those who do not like those strategies.
Therefore, for each strategy, we only go through the most basic concepts, enough to give you the most basic knowledge, with the most specific orientation. From there, readers can choose the most suitable investment method for themselves, and with the basic knowledge in this series, readers can learn more about those methods if they want and make their own investment decisions.
1. Dividend Investing
We have learned about dividends . In short, dividends are when a company makes a profit, in addition to the part for reinvestment, the remaining profit will be distributed to the shareholders who own the company.
Dividend schedules vary from company to company, and can be quarterly, semi-annually, or annually. This leads to the first investment strategy, which is dividend investing .
Investors in this form will focus on companies that pay high and stable dividends, from which the profits from these dividends will be a source of passive income for them. This strategy is similar to spending money to buy a house and renting it out, and every month the rent will be sent to you as a form of passive income.
That is why this strategy is also called Income investing . And there are usually two main forms of dividend payment to shareholders, which are cash dividends or stock dividends. Investors tend to choose to receive stock dividends instead of cash, to increase the number of shares they hold, thereby increasing the value of the investment they have made.
However, it should be noted that companies have the right to stop paying dividends if they want. For example, if the business situation is not as expected so they do not make a profit, or they need capital to invest in a new field, they have the right to stop paying dividends or reduce the dividend payment rate.
In fact, there are stocks of companies that are specifically designed to attract this type of investor, and these companies attract investors with their dividend policy rather than with the company’s growth potential.
Since the most attractive factor of these companies is dividends, they will try to avoid not paying dividends or reducing the dividend rate as much as possible. If they do so, investors will sell the company’s shares and move to other companies, and as we know, if too many people sell, the company’s value will go down.
“When a company starts paying dividends, it no longer knows what to invest in” – Elon Musk
Some advantages of this strategy:
- Create passive income .
- Usually these dividends will come regularly and in most cases we can predict in advance, which will help us plan our expenses in life more easily (periodic and stable income).
- If we spread out and invest in many companies, even if the dividends of some companies increase or decrease or some companies stop paying dividends, we still don’t have to worry because this income changes too much (mental comfort).
- These investments will be less affected by inflation.
In addition, this strategy also has some disadvantages as follows:
- Because it generates more income for you, you have to pay more taxes, and usually companies will automatically deduct this tax before paying dividends to you, meaning the dividends you receive are tax-inclusive.
- Companies in this investment strategy will often grow very slowly, but in return, this investment will be safer. And if companies spend too much money on dividends, they will not have much capital left to reinvest or invest in other areas. Therefore, shareholders tend to want to receive more dividends to create conditions for the company to have enough cash to grow.
- In my personal opinion, this form of investment is quite boring because we don’t have to do anything, just throw money in and wait for dividends.
- However, because the dividend payout ratio is also relatively small, you need to have a certain amount of capital to be able to clearly see the growth of this investment.
In general, this is a relatively safe strategy and is suitable for those who do not like to look too much at the electronic board and do not want to pay too much attention to the market. To ensure that you can receive high and stable dividends, my advice is that you should choose Blue chip companies , which are large companies, have developed steadily and are unlikely to go bankrupt in the near future.
With such Blue chip companies, although it will be difficult for them to have a breakthrough in growth and the cost of buying shares will be quite large (because their stock value has also increased quite high with the company’s development), in return, their annual profits will be relatively stable, so the dividend schedule will also be more stable.
As for small, unstable companies, the dividend rate will be higher, the purchase cost may be cheaper but there is no stability, and because this is a long-term investment strategy, these small companies will have higher risks than Blue chip companies.
A Blue Chip company is understood to be a company with a nationwide reputation. Currently, a Blue Chip company will usually be established for a long time and have a healthy financial source. Blue chips will usually sell high quality products and services that are widely accepted. – luatduonggia.vn
Figure 1: Mr. Ronald Read, one of the very successful people with this form of dividend investment.
2. Growth Investing
Growth investing is the complete opposite of dividend investing. Investors with this strategy will hunt for and invest in companies that are growing faster than the market.
On average, the general growth rate of the market will usually fall between 10% and 15% per year, while with this Growth investing strategy, investors can receive a growth rate of 20%, 30%, 50%, … or in some special cases, it can be up to several hundred%. Typically, Tesla’s stock has increased by more than 1000% in less than 2 years.
It sounds attractive, but to be able to invest in this way, we must answer the important question “how to know if a company has high growth potential in the future?” . To answer this question, people must use many different analytical factors, and those factors as well as the methods to analyze them are extremely complicated.
In this series, I will only share some simple indicators that people use to analyze the growth potential of a company without going too deeply into this method. If you are interested, you can find out more on the internet.
EPS (Earnings Per Share) is an index representing a company’s profit on the total number of shares that the company has issued. Specifically, it is calculated by the formula:
EPS = (TOTAL PROFIT − DIVIDEND) ÷ TOTAL NUMBER OF SHARES
The P/E (Price – to – Earnings) index is the ratio that investors are willing to pay compared to the company’s profit margin (EPS), specifically it is calculated by the formula:
P/E = CURRENT SHARE PRICE ÷ EPS
For example, we have a company with a total of 100,000 shares, this year they make a profit of 1 million dollars and they decide to take 200 thousand dollars to pay dividends to shareholders, at this time the company’s EPS will be
EPS = ($1,000,000 − $200,000) ÷ 100,000 = $8
From here we can understand that the higher the EPS, the more effective the company is operating. Suppose because in the current market, many investors believe that this company will continue to develop in the future, so they are willing to pay a higher price, leading to more and more demand than supply, and finally the market price that everyone is willing to pay for the company’s stock is $80 / share.
And with EPS = $8 like that, we will have the value of P/E as:
P/E = $80 ÷ $8 = 10x
This means that the company’s P/E ratio is currently 10 times. Simply put, looking at the P/E ratio, we can see that investors are willing to pay 10 times more than the profit ratio that the company is making. From there, we can understand more broadly that the P/E ratio represents investor confidence based on the profit margin.
When talking about Growth investing strategy, people often look at the P/E ratio. Imagine a company with a low EPS ratio, meaning their profits are low, but people around them still pay a lot of money to own that company (high P/E ratio). That means the market believes that the company can grow many times in the future.
However, EPS and P/E are just a few of the many different signals in this strategy. To have the most accurate assessment of a company’s growth potential, we must also analyze the potential market, the technology the company owns, the management team, the field in which the company operates, its competitors, the segment the company is targeting, and many other factors.
This investment strategy also has many potential risks, to minimize the risk, the only way is to accurately determine the company’s growth potential. To accurately determine the company’s growth potential, investors must go through a series of analyses of many of the above factors.
This is a strategy to distinguish between investors and gamblers who follow the crowd. Because when the crowd rushes to follow each other, it is too late to invest in the company according to the Growth investing strategy. At this point, the company’s value has increased too high and it is difficult to grow rapidly anymore, it may even go down.
If you want to invest with this strategy, you have to invest when the company is still small and no one is paying attention to it. And to be able to determine which company will become a billion-dollar company, which company will become a bomb, go bankrupt and disappear, it all depends on how deeply the investors dig into that company.
Through the above analysis, you can see the advantages and disadvantages of the Growth investing strategy. Its advantage is that it will bring you huge profits, but its disadvantage is that it requires you to spend a lot of time and have a sharp analytical ability along with solid knowledge of the market, to be able to properly assess the growth potential of the company.
If you analyze wrongly, the risk level of this strategy will also be very high, you can lose your assets because of a wrong investment decision.
3. Value Investing
Value investing is one of the strategies that stock investment legend Warren Buffett applies a lot, and this can be considered one of the strategies that brings him the greatest profit and success.
This strategy has a similar principle to the growth investing strategy, but there is one fundamental difference: the value investing strategy focuses on the real value of the company rather than the growth potential of the company.
We have known that when a company IPOs, the value of the company will be decided by the market, that is, based on the supply and demand factors of a certain stock code, and it is no longer based on the real market price of that company.
When people rush to buy a company’s shares, there will be more buyers than sellers, and the value of the company will increase. Conversely, if there are more sellers, the stock price will decrease, and the value of the company will decrease.
Such fluctuations in stock prices will cause the company’s value to move away from its true value, and this is the key to value investing, which is also the reason why the name of this strategy has the word value in it.
For Growth investing, investors will focus on analyzing potential growth factors in the future.
As for the Value investing strategy, investors will not focus on whether the companies they intend to invest in will continue to grow or not, but they will focus on analyzing the true value of those companies, then compare it with the current trading value of that company on the market.
From there they will have the answer to the question “Is the company’s selling price being sold at a price lower than its real value or not?” .
That is the most fundamental difference between Value investing and Growth investing, the remaining issues are also relatively similar. That is, you still need to analyze many factors surrounding the company to be able to determine the true value of that company, from which you can make the right investment decisions.
This investment strategy will focus on the company’s value, so investors are always very alert to any form of FOMO (Fear Of Missing Out) in the market, because they fundamentally believe in the true value of the company, not in the crowd in the market.
For example, when news of a company being inspected comes out, all the “gamblers” in the market immediately suffer from FOMO and follow the crowd effect, quickly sell off their stocks to avoid losses. However, value investors are confident in the true value of the company, and believe that the company has done nothing wrong, so they take advantage of the situation to buy more stocks when the stock price is falling due to the crowd effect of FOMO.
As a result, the inspection was just a regular form of government inspection. The company did nothing wrong, and because the company did business properly, after the inspection, not only were no violations discovered, but on the contrary, the company gained a good reputation for “complying with state regulations.”
At this time, the “gamblers” are FOMO and rush to buy to avoid having to buy stocks at high prices, at the same time pushing up the stock price and the company’s value on the market, and this is when value investors reap the rewards.
“Be fearful when others are greedy and greedy when others are fearful” – Warren Buffett
Value investing strategy also has similarities with Dividend investing strategy. Even Blue chip companies will have ups and downs with the market, and investors following the Dividend investing strategy also believe in the true value of the company, so they take advantage of the opportunity when the company’s stock goes down due to FOMO to buy in to increase their assets.
Warren Buffett and Benjamin Graham are legends of value investing.
Because of the similarities between Growth investing and Value investing, the advantages and disadvantages of these two strategies are not very different. The only small difference is that the profit of the Value investing strategy will usually not be as much as Growth investing, so the risk level will also be lower.
Thank you for reading my sharing, hopefully it has brought more or less useful value to you.
- Sky -