Before an investor chooses an investment strategy, it is important for the investor to choose the type of analysis that he or she is comfortable with before deploying the strategy:

At a high level, there are two types of analysis that one can do in public market investing:

(a) Fundamental analysis

This analysis is about understanding the financial as well as economic factors that impact the share prices and other asset classes. One must ideally have some understanding of factors that affect global as well as national economies. At a micro level, one will need to understand what are the factors that will impact sales, profits, balance sheet metrics. In addition, one needs to also understand  what are the factors that impact valuation. Experienced investors have a detail understanding of all these factors. There are some essential metrics that all investors should be aware of in order to make an investment decision. Fundamental analysis is also applied in private market investing such as Angel Investing, Venture Capital investing and Private Equity investing.

(b) Technical analysis

This type of analysis deals with study pricing behavior in charts  and predicting what will happen to the price going forward. Typically, technical analysis looks at chart patterns, previous boundaries of prices, mathematical indicators of momentum or direction, and other such parameters.

Technical analysis is usually used for more shorter investment time frames while fundamental analysis is used for more longer investment time frames. Investors should start teaching themselves at least one of the above. Depending on which of the two analyses the investor is comfortable with, the investor should then choose an investment strategy that he or she can further learn and build an expertise in.

There are various types of financial investment strategies. For each strategy, it is important for the investor to plan for various scenarios and to stick to that plan.

1              Buy and hold – medium term to long term

This is the most commonly used strategy by investors world over. There is no specific definition of medium term, but it refers to holding the shares for a few months. Long term could mean holding the shares for years. In this strategy, investors should analyze businesses  and evaluate their prospects as well as valuation multiples. If the prospects for the business look strong and the entry price is attractive given the outlook, then the investor should purchase the shares. An entrepreneur who generates vast wealth is at some level a buy and hold investor who held on to a successful business built by him through thick and  thin for many years.

Fundamental analysis is usually conducted for this strategy.

There are 2 variants of this strategy: Value investing and Growth investing.

1.1 Value investing refers to purchasing shares whose prices are very attractive. The business itself may not be a very lucrative growth business but if it that business’ share price is undervalued compared to its fair value then a purchase is made

1.2 Growth investing refers to investing in businesses that are growing rapidly. The valuation multiples for these businesses may be quite high. Investors invest in these businesses believing that if growth remains strong then the valuation multiples will also remain high.

This strategy can be applied to any asset class, be it listed or unlisted equities, bonds, debentures, forex, commodities, real estate, etc.

2              Short term strategies

Usually trading strategies that are regularly focused on short term opportunities rely on using technical analysis. These strategies can be used for investment period of a few seconds or even a few months.

Examples including checking if a stock price has reached a certain ‘resistance’ range based on its historical chart and also if a particular indicator (example RSI) indicates a favorable signal then the stock is bought.

Leveraged based strategies:

3              Use existing shares as collateral and selling options                                         

This strategy can be used to generate extra income without deploying more capital. However, it is a very risky as writing options can lead to significant losses if market moves in an unfavorable manner. This is a leveraged based strategy.

4              Use existing shares as collateral and buy/sell futures

Futures are products constructed with leveraged. For example, one Lot of Dow Jones Futures may comprise of 3 unit of Dow Jones. Similar to selling options, shares can be collateralized to sell shares futures. This is again a high risk-high return strategy.

6              Use existing shares as collateral to raise loans to buy more shares

There are financing firms that  provide loans against shares. These shares can be again used to buy shares. This strategy is similar to the one described in point 4 above.

7              Long short strategy – buy shares of one company and sell futures of a correlated share in a similar/same industry

In this strategy, there is some hedging because the shares that been purchased and sold will both fall if the broader market falls and rise if the broader market rises. What matters in this strategy is that the share that has been purchased should outperform the share that has been sold. When Hedge Funds started becoming popular, this was a commonly used strategy and hence ‘Hedge’ Funds got their name.

8              Forex and commodities

These instruments are very highly levered (at times 1:500 times) and these markets operate 24 hours a day. These are also large markets  globally. Because of these factors, traders are able to take larger positions. Depending on the time frame for investments, fundamental and as well as technical analysis can be applied.

9              Trading options

Options can be used to take leveraged positions along with built in stop losses

As an example, if an investor has 100 USD to invest, he can buy a call option for USD 20 which effectively helps him buy shares of USD 400. If the Strike Price is not achieved, then the investor loses only USD 20               

Generally, options traded on exchanges are for the next 3 months. Therefore, technical analysis plays a key role in trading options given the short-term nature of the investment strategies.

10           Trading bonds

Bonds are classified in different categories such as AA, AAA, BB and so on by government licensed credit agencies. If a company’s credit rating improves then its bond price goes up as its existing bonds are now considered to be less risky than before. Not all bonds are listed. Depending on the time frame for investments, fundamental and as well as technical analysis can be applied.

 

Disclaimer: Vitspan does not provide any investment related, tax related or financial advice. The information presented is done so without considering the investment objectives, risk profile, or economic circumstances of any reader or investor. The information presented may not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the potential loss of principal. Please consult your financial advisor prior to making investment related decisions.