How to make an investing strategy using 3 main stock strategies
Disclaimer: I am not a financial advisor. Any trades listed or talked about are my own personal trades and are meant for informational purposes. I am not providing investment advice.
TL;DR (skip to whichever section fits you best)
Dividend Investing as a Stock Investment Strategy (Passive, Long-Term Oriented)
Selling Options as a Stock Investment Strategy (Active, Cash-Flow Oriented)
Small-Cap Investing as a Stock Investment Strategy (Active, High Risk-High Reward)
There is no one size fits all investment strategy, especially in the stock market. If you start to read about a stock investment strategy on the internet, you will see many different perspectives and strategies. Each has pros and cons associated with them.
In this post, I allow you to reflect on your needs and what you want. From there, you will be better equipped to make an investment strategy.
There are many more than 3 types of investment strategies that are out there and the reason I am only talking about these is that these are all the investment strategies that I have tried and have worked for me.
What not to include in your investment strategy
Micro-Cap Investing, also known as penny stock investing. Although this can make you extremely rich, it also has the ability to bring your account size down to 0.
My recommendation is to stay away from the headlines “day trading penny stocks” or “top penny stocks”.
Often times with penny stocks, there is a strategy called “pump and dump”. Investors will hype up the stock, get the price up high and then once it reaches a certain point there is a major sell-off.
The investors orchestrating this pump and dump will come out on top with profits, leaving you with no profits.
There are several different investment strategies that I will not cover which may be suitable for you. That is why you need to do research before deciding on anything with the stock market.
How To Make An Investment Strategy Using Dividend Investing
(Passive, Long-Term Oriented)
What is a dividend?
If you are new to the stock market and finding an investment strategy, you will come across two terms, Dividend and Yield, and they are used interchangeably and essentially mean the same thing. Dividends are typically paid quarterly (4 times per year), and is paid based on how many shares you own.
For example, if $TD is paying a $2.00 dividend and you own 200 shares, assuming you collect for all 4 quarters, you will receive $400 ($2.00×200=$400) to hold the stock.
The term “yield”, is the dividend amount expressed as a percentage (%) of the current stock price. If the current stock price is $100 and the company is paying a $2.00 dividend, your yearly dividend is 2%.
Who is the dividend investing strategy for?
Typical Characteristics of someone looking at a dividend investing stock portfolio (a portfolio filled with dividend-paying stocks):
– Long-term oriented: You are not looking for short-term gains and are entering trades for minimums of 8-12 months typically.
– Appreciation Over Flipping: You are not looking to “flip” the stock for a buck or two, for example: Purchasing $DIS (Disney) for $130 and then two weeks later flipping it for $136.
– Passive: You are not going to be looking at your portfolio every day and worrying about the current market price. Dividend Investors do not care about the daily price and will not sweat if the stock is down.
– Time-Strapped, Not Cash: Typically dividend investors have a lot of cash and are willing to invest a lot of their money into the stock market. If you are looking for serious dividend returns, you will need to own a significant amount of shares. These should always be done through a diversified portfolio.
How much money do I need to become a dividend investor?
There is no minimum or maximum, and you will need what you can afford. However, the more capital you have, the higher potential for earnings.
When I talk to people about dividend investing, a common question that arises is “How much money do I need to invest in order to live off of my dividends?”
The answer is probably more than you think. Let’s break down the math.
Assuming you want to earn around $3,000/month, you can look at it this way.
$3,000×12 = $36,000
You need to earn $36,000 in a year.
If you are investing in a company like Simon Property Group ($SPG), which pays upwards of 4% yield typically, you would need to own $1,000,000 of $SPG.
$1,000,000 x 4% = $40,000 / 12 months = $3,333/month
Keep in mind you are going to be collecting the dividends on a quarterly basis and not a monthly basis.
The Aggressive Dividend Investor
The follow-up question to the answer I give usually is something along the lines of “But I don’t have $1,000,000, what should I do?”.
And most people don’t have $1,000,000 to invest in the stock market, so do not worry.
If you love the dividend investment strategy but feel like you don’t have the money, here is a riskier play.
Go to your local bank, ask them to borrow as much as you can. Perhaps even take a HELOC (Home Equity Line of Credit) and put that into your stock broker account.
Know your numbers! If you go to the bank, find out your interest rate and know your penalties, you can use that to your advantage.
For example, lets say you took a loan for $100,000 and you had to pay 3.50% interest on yearly. That means you are bound to pay $3500 just on interest. Now, let’s say you used that $100,000 to invest in a high dividend stock that pays more than 5%.
You put your $100,000 into the stock, collect $5000 a year and pay down your interest of $3500. The $2500 left is profit, which you can use the rest to purchase more shares.
The following year you will own more shares, your dividends will be higher, but your interest will remain the same. You then roll your profits once again and purchase more shares of the stock. Over time, you are buying shares of the stock for free (almost free!).
What To Avoid When Stock Investing With Dividends
When you are strictly looking for dividend yields, you will want to make sure that you are diversified in the stocks that you choose. This means having stocks in companies across different sectors.
For example, you can split your portfolio up 4 ways.
1 (0-25%) of your portfolio: Banks and Financial Services
2 (26-50%) of your portfolio: Real Estate (REITs)
3 (51-75%) of your portfolio: Tech, Retail, CPG
4 (76%-100%) of your portfolio: Energy, Commodities (Gold, Silver, etc.)
This will give you the best probability of always maintaining a positive portfolio. If one sector gets hit hard and all your money is in that sector, you are going to feel it greatly.
How The Long Term Dividend Investor Really Wins
So, you’ve decided to take a loan or not… which is fine. You understand that you need a large portfolio in order to see those dividends retire you!
What we have not accounted for was the long-term appreciation that you may receive over the course of the company growth.
The best way to illustrate this is by actually looking at stocks that pay dividends in history.
Click any of the images below to enlarge them.
It is not uncommon for the average high dividend investor to hold onto stocks for 10-15 years. Let’s take a closer look at each of the stocks and what they paid in appreciation and dividend yield.
Yearly Dividend: 3.48%
Appreciation from 2012 ($93) to today ($169) is 81%!
Pinnacle West Capital Corporation ($PNW)
Yearly Dividend: 4.26%
Appreciation from 2009 ($27) to today ($78) is 188%! It more than doubled.
Artisan Partners Asset Management Inc ($APAM)
Yearly Dividend: 6.24%, extremely high dividend company!
Appreciation from 2016 ($31) to today ($53) is 70%!
BHP Group Ltd ($BHP)
Yearly Dividend: 3.36%
Appreciation from 2016 ($21.50) to today ($71) is 230%! That is incredible! In this example, you are more than tripling your money.
How To Make An Investment Strategy Using Options
(Active, Cash-Flow Oriented)
What is an Option?
A stock option buyer gives you, the investor/shareholder, the right, but not the obligation to buy or sell a stock at an agreed-upon price (strike price) at an agreed-upon date (expiration date).
A stock option seller gives you, the investor/shareholder, the obligation to buy or sell a stock at an agreed-upon price (strike price) at an agreed-upon date (expiration date).
Is Buying Or Selling Options Better?
When you look online for options trading, you will return the results of stock option buyers! This is because it is extremely easy to portray a get rich quick method with this strategy. You will see people saying “Pay $500 now to control the stock, and if it goes up to $10, then you can immediately flip it for $4000”. Or at least something along those lines.
To directly answer the question, if you want unlimited upside (meaning your profit is uncapped) and limited downside, then buying options is better than selling them.
If you are looking for calculated downside (meaning you are buying stocks you want to buy, at prices under the market) and limited upside, then selling options is better than buying them. This is what I LOVE!
Understanding The Lingo For Options
Strike Price: This is the price that you will agree on purchasing or selling the stock.
Expiration Date: The date that the other party has to exercise the option by.
Contracts: With stocks, you can buy or sell however many you like, with options, you need to buy and sell contracts. Each contract represents 100 shares. Yes, this means that you cannot purchase less than 100 shares!
Premiums: Think about premium like insurance. You are either paying a premium or receiving a premium depending on what side you or on.
Why I Only Sell Options
I love being the insurance company! I know that I can collect a 1% minimum on my money every single week, and I use that to grow my portfolio every single year!
For the past year, I’ve averaged about 6% a month, but my goal is only 4%, which breaks down to 1% a week.
Live-Case Study of My Portfolio
Starting Balance: $20,000
Premiums Collected in 2019: $12,636
Ending Balance Jan 1, 2020: $32,636
By utilizing the strategy, I was able to make 63.18% on my money!
Since December 2020, I’ve actually been documenting my weekly trades, which you can watch here.
This strategy requires being active on the stock market and potentially making anywhere from 1-5 trades per week. Each trade can take me up to 10 minutes and on average, I spend about 60 minutes a week earning 1%+ on my money.
This time includes reading news and charts of companies I follow, as well as making the actual trades on my brokerage account.
This strategy is definitely not for you if you don’t have the time or don’t want to spend the time watching the market during the week.
Now, you’re probably thinking, this all sounds fine and dandy, but how do you actually earn a premium for your trades, technically speaking!
The strategy would be “writing naked puts” and “writing covered calls”.
The term, “writing” means that you are selling, which would relate to your actual trade. When you log in to your trading desk/trading app, you will want to hit “sell” instead of “buy”.
The term, “naked” means that you DO NOT own the shares already in your portfolio.
The term, “covered” means that already OWN the shares in your portfolio.
The strategy I use starts with writing naked puts, if exercised, then I write covered calls to average my cost down and to eventually exit out of a position.
One of my trades
December 23rd I wrote a naked put on $ETSY (Etsy.com) with a strike price of $182.50 and an expiry date of December 31st, a 7-day trade. I received a premium of $1.88 ($188), which follows my 1% rule, which in this case was 1.03%.
$ETSY had a market price of $192.5 at the time of writing the naked put, meaning that it had to drop $10 before it got exercised.
Sure enough, there was market news and Etsy dropped to $178 by December 31st, and the BUYER (the person who gave me the $188) exercised the right to make me purchase it at the agreed-upon price, $182.50.
I purchased $18,250 worth of ETSY shares, and I was thrilled! I was thrilled because I owned a company that I love and believe in, at a price that I believe is worth it.
While ETSY was hovering around $178-$180, I was able to sell a covered call (remember, covered is when you own the shares and you use it to average your cost down to exit the position).
On January 8th, I wrote a covered call with a strike price of $183.50 and an expiry date of Jan 15th. This paid me $1.27 ($127).
Etsy.com continued to hover around the same market price and it expired worthless. This means that the buyer did not exercise the right and 100% of the premiums was kept.
I decided to write another covered call, this time on January 15th with a January 22nd expiry and a $183.50 strike price once again. The premiums paid $1.90 this time ($190).
The Exit Strategy (financials)
Etsy shot up the following week and the buyer exercised their right, therefore I had to sell the stock at the agreed-upon price of $183.50.
Let’s break down the numbers here for you.
Purchased 100 shares of $ETSY at $182.50 each.
100x$182.50 = -$18,250
However, I received $1.88 in premiums for my writing of the naked put.
$182.50 – $1.88 = $180.62 is my new average cost
I then wrote another covered call
$180.62 – $1.27 = $179.35
I then wrote another covered call
$179.35 – $1.90 = $177.45
$177.45 is my new average cost!
I then sold the 100 shares at the agreed-upon price of $183.50.
100 shares x $183.50 = $18,350
($18,350-$18,250) + $188 + $127 + 190 = $605!
$605 made in 3 weeks’ time!
$605/$18,250 = 3.31% on my money in 3 weeks!
This is an example of a trade that did not go as planned!
Now, let’s look at an example that worked out perfectly for me where I did not have to purchase the shares.
On January 28th, I wrote a naked put for $CRSR (Corsair.com) with a $35 strike price ($37 was market price) and expiry in 3 weeks’ time. I received a premium of $4.45, which was incredibly high due to earnings coming up and the volatility is unknown.
In addition, I wrote 3 contracts instead of one, so instead of 100 shares, it would be 300 shares.
I never got exercised on the shares because $CRSR stayed well above $35, and because of that, I kept all $4.45/share!
The Nitty Gritty (The Financials)
$4.45 x 300 = $1335!
$1335 in profits in just 3 weeks’ time.
My total risk:
300 shares x $35 = $10,500
Total Yield =
$1335/$10,500 = 12.71%!
Follow My Journey
Over the past few years, I have been trading options for weekly income and have had great success doing it. Read more how I made $1378 in profits in just one week trading options.
My goal is to make 1% on my portfolio size per week.
As a means to keep track of this myself, I started documenting it here on YouTube, and share the latest video below. Feel free to go back and watch the journey, where I started with just $30,000!
How To Make An Investment Strategy Using Small-Cap Stocks
(Active, High Risk-High Reward)
Full disclosure: I do not do ANY small-cap investing anymore and therefore, do not feel the need to go too far in-depth with this section, but I will give a brief overview.
What is a “Small-Cap” Stock?
Investopedia defines “Small Cap” as companies with a relatively small market capitalization. A company’s market capitalization is the market value of its outstanding shares. Small cap definitions vary, but generally, it means a company with a $300 million to $2 billion in market capitalization.
Why Would I Invest In Small-Cap Stocks?
You would want to invest in small cap stocks if you are looking for high risk, yet high reward in a shorter time frame than most trades.
Small cap stocks tend to have more volatility and more “boom or bust” potential, so you could ride the wave or die with the wave, metaphorically speaking.
How To Choose Small Cap Stocks?
At the time I was doing small cap investing, I was looking for companies that have something that will revolutionize an industry, or an industry that is ripe for disruption.
My whole idea behind this strategy was to hopefully put a few hundred bucks in the next Apple ($AAPL) or Tesla ($TSLA) for under $20 and cash out when it hits $300!
Why Is Small Cap Investing Considered Active?
Typically, small cap stocks are move more frequently, with larger ranges over a larger cap stock.
For example, Company SC is a small cap stock and Company LC is a large cap stock.
Company SC opened the trading day at $10 today, whereas Company LC opened the trading day at $87.
Throughout the day, Company SC may have hit anywhere from $6 to $18. Company LC has a higher chance of staying between $86-$89.
If you want to limit your losses, or realize your profits, you will need to be actively looking throughout the day. If not, it may be further down than you expected due to the fast movements.
Who Is Small Cap Investing For?
Small Cap investing is for people who have “fun” money and look at it as a calculated gamble.
Best of luck to the small cap investors!
Still Confused about How To Make An Investment Strategy Right For You?
Investing in the stock market is not for everyone. Educate yourself and know what you are doing before you get into it. It is risky and if you are not careful or do not know what you are doing, you may lose a lot.
The best option if you know you want to get started but don’t know how is to open up a paper trading account. A paper trading account lets use trade with fake money. Do not be stupid about your decisions because you know it is fake money.
Do it for 3 months and see how you are doing after 3 months, are your returns positive or negative? Can you explain your strategy? Do you think you can replicate it or did you just get lucky?