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Investment Strategies

Before 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

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.