How to Be Successful Trading on the Stock Market

Man watering a money tree as a simile for growing his investments.

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You must expend some effort to be a successful investor—there's no getting around that fact. Investors who buy or sell on their "gut or feeling" about a stock or other fungible asset may be right sometimes, but most of the time they will be wrong.

Being right on occasion is not a winning stock investment strategy. The steps to successful investing in the stock market are simple—it's the execution that is not so easy. Just as a football team would not take the field without a game strategy, an investor should not enter the market without a strategy.

Set Some Financial Goals and Choose a Strategy

It's a cliché, but it is true—you must know where you are going so you will know you are there when you arrive.

Your goals should be specific and focused. For example, "I want to retire in about 20 years and have a nice, fat nest egg" is not a good goal. A better goal might be: "I am 40 years old and want to retire by age 65. At age 50, I will have built my nest-egg (not including 401(k)) to $250,000. At age 55, it will be $350,000. At age 60, it will be $500,000, and at retirement, it will be $600,000."

These numbers may be off for you and you probably have other goals, such as a college fund or buying a home. However, the point is you need to focus on specific goals with specific deadlines if you are going to be successful.

There are three basic investing approaches: value, growth, and blended. You will hear others mentioned, but these three are the basis for all others.

Value Investing

Value investing may be the most difficult, but may also offer the best return over the long term.

Value investors find companies that are trading at prices significantly below their true market value. The companies may be out of favor with the stock market because they are not in the current hot stock sector, or they are in an unglamorous industry that investors find dull.

This form of investing was invented by Benjamin Graham and then made popular by legendary Berkshire Hathaway chairman Warren Buffett.

The difficult part of value investing is identifying and analyzing candidates. Value investing requires some deep diving into the company's financials to find out what the true or intrinsic value is and why this value is at odds with the stock's price.

However, the payoff can be significant when the stock market discovers the stock and bids up its price from the low point when you purchased to a much truer level. This may require you to hold the stock for a long period and require you to update your assessment on a regular basis.

Growth Investing

Growth investing is the sexy part of the stock market. It involves finding companies with strong future growth potential. You want to avoid the shooting stars that shine brightly in the market for a short period, then disappear. You are looking for solid companies poised for continued growth.

Growth investing can involve more risk if you focus too heavily on small-cap stocks that have the potential for rapid growth, but also face tremendous odds for long-term success.

There are large-cap stocks that are in strong growth positions. Your job is to find those that match your strategy, goals, and risk tolerance.

The majority of traded companies are large-cap stocks. These are the household names like Coca-Cola and Google.

Blended Investing

Blended investing—also called balanced investing—is a combination of growth and value investing strategies. By combining the two and practicing good asset allocation, investors in the stock market can hit the best of both. You can adjust the mix to increase or decrease potential return (and risk) to fit your particular goals and timeframe.

Your personal risk tolerance is an important ingredient in your investment strategy. If you are comfortable losing some of your original investment on the road to a greater return, it can be worth putting more of your total investment dollars into stocks.

Article Sources

  1. U.S. Securities and Exchange Commission. "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing." Accessed Sept. 2, 2020.