If you are asking the question how do I get started making higher returns than the bank gives me, or just getting a return while avoiding interest / riba as well as a profitable return.Over the next few paragraphs I’ll share with you four simple techniques of investing that can generate you from 12% to excess of 100% of return in the stock market.
Over my own course of learning and investing in the stock market I have learned that you must use all of these strategies together to earn significant returns while reducing the risk. For obvious reasons you should start with the easiest first and then move up towards higher risk / bigger rewards.
The strategies are as follows from least risk to highest risk and from least return to highest return;
- Buying the market
- Value investing
- Momentum investing
- Options trading.
Each of these investing strategies are distinct in their nature and used for specific purposes.
Buying the market
This is the easiest strategy with the least amount of risk and the lowest return (still significantly higher than what you are earning with keeping your money in the bank or under the mattress). You just invest in the S&P 500 index, or buy a fund that tracks the S&P500 index. The easier of the two is to buy units in a fund that tracks the performance of the S&P 500 index. This will ensure you get returns equal to the overall increase of the market. This is a long-term strategy and any investment should be typically made for more than 5 years.
Value investing
This strategy is used by investors like Warren Buffet, where you identify an undervalued company, invest in it for the long term and get a profit based on the increase in the company’s market value. There are specific criteria for identifying undervalued companies that we will discuss in a future post. However because of following the specific criteria, such as the company is a monopoly, or has a monopoly over a product or service, has consistent growth over the past 10 years, has significant future growth potential, is priced below its intrinsic value etc. This strategy typically returns between 15-20% years over year. Investments in this strategy are done for an average of 1 to 5 years.
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Momentum investing
This strategy includes an element of probability analysis based on past performance. This is used by sophisticated investors like George Soros to beat the market when it is going up or down. Just by estimating which direction the market is going to move and buying and selling on that basis. Though often thought of as speculative investing, modern traders have modified this strategy to include value investing through which you can make educated calculative predictions on which direction that market will take a value investment and buy and sell in the short term to earn profits in excess of 25%. This is typically a 3 month to 6 month trading strategy.
Options trading
Options trading is the most complex type of trading on the stock market, with the highest returns. In reality it is neither complex nor risky but it does require higher discipline and specific systems to be in place for you to make a profit. This strategy is used by highly sophisticated investors to earn returns in excess of 100% on their investments in a few days. Options trading involves controlling a vast number of shares based on a small amount of initial investment. (This is a complex trading strategy requires a more detailed explanation which will be dealt with in future posts).