Game and Real World Investment Strategies

Overview

Wouldn't it be great to know which company will be the next Microsoft or Dell? Unfortunately even the greatest minds on Wall Street can't tell you. But don't lose hope. There are plenty of ways to bolster your returns. Before using them in the real world, we highly suggest you try them in the game--it's a lot less riskier.

Some of the main investment strategies used by professional money managers are value, growth, dogs of the dow and random walk.

Value

Value Investing is the style we at Max's Investment World Stock Market Challenge subscribe to. Basically, it means looking for stocks that are undervalued relative to their peers and the market as a whole. One way to find them is to use quantitative measures, such as price-to-earnings, price-to-cashflow and price-to-book ratios, which attempt to measure a particular company's value against others. Value stocks generally have such ratios below the mean of their peers. For example if Company x has a price-earnings ratio of 10 and its peers have an average of 20, Company x may be undervalued. Of course, using such ratios is the starting point for more fundamental research about the company, such as why it is undervalued and what its prospects are.

Growth

Growth managers look for stocks who are experiencing higher than normal growth in their sales and profits. If a company is growing by 30 percent a year in terms of sales or profits and its peers are only growing at 10 percent, on a consistent basis, then the company could be a growth stock. Hopefully, the company will grow even faster and at a level that justifies the normally high prices of growth stocks.

Dogs of the Dow

This is essentially another value investing strategy that looks at the 30 largest industrial stocks in the U.S. By picking the stocks in that group that have the highest dividend ratio (dividends divided by the price), you're essentially looking for stocks with low price-earnings and other ratios that are temporarily out of favor.

Indexing

This is a strategy that says, hey, "I'm too busy to try to find great stocks, I'll just accept the returns offered by the stock market as a whole." This strategy has made the Vanguard Group a huge mutual fund company. Vanguard offers a series of stock mutual funds that invest in the market as a whole, such as the S&P500, the Russell 2000 and other indices of stock market activity.

To use any of these strategies, merely click on the highlighted stock symbol you've chosen for possible investment in the game.

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