There are more than just three ways to invest. In fact, there are an infinite number of ways that you can play the markets. I’m just going to give you three very general and broad investing strategies that many people use. You can use one or a combination of these to invest your money.
The most famous of these strategies is the value investing approach. The investors that have made this famous are Warren Buffett and Benjamin Graham. I would consider Graham the father of how to invest in the stock market using this method.
This is basically where you start out by finding fundamentally good companies. That means you do a full analysis to make sure they are a legitimate company with a reputable brand and growing market. Once you do a valuation of your own, you find out what the market cap is. If it is significantly lower than what you think the company is worth, then it might be a good deal. Usually companies with low P/E ratios are the best candidates for this method.
Then there is the growth strategy. This is where you try to find companies that have historical growth in earnings exceeding 10-15% per year. You also want them to be able to grow their earnings by more than 15% per year. With these stocks, you almost don’t care what they are trading at because they will most likely continue to grow. Think Google, Apple and Netflix right now.
The last is called GARP. This stock investment strategy is a hybrid of the two. You are trying to get potential growth companies and this time, you do care about the share price. If you think the market valuations are low and earnings growth potential is there, this method will think that it is a good stock to invest in.