There are several different strategies for investing in stocks. The most common strategies are the buy-and-hold strategy, the dollar-cost averaging strategy, and the dividend-reinvestment strategy.

 Buy-and-Hold Strategy

The buy-and-hold strategy refers to buying a stock and holding it for an extended period of time. This is a very cost-effective long-term strategy. This strategy helps investors minimize brokerage fees and avoid market timing, where investors try to forecast whether the market will go up or down and invest accordingly. It also minimizes taxes because realized gains are taxed as long-term capital gains instead of short-term capital gains. Since you keep the stock for an extended period of time, you are not taxed on unrealized capital gains until these gains are realized when you sell the stock. Moreover, while you may still receive dividends each year, these dividends are taxed at lower rates than interest rates on bonds or savings accounts.

Dollar-Cost Averaging

Dollar-cost averaging refers to purchasing a fixed dollar amount of a security at regular intervals, for example, every month. This investing strategy is based on the general trend of the market and averages out fluctuations in the market: it takes luck and market timing out of the equation, and it adds discipline to your investing. This is a good investment strategy, particularly if you are planning to fund your investments by paying yourself (taking 10 to 20 percent or more out of your paycheck each month).

Dividend-Reinvestment Plans (DRIPS)

A dividend-reinvestment plan refers to a strategy in which additional shares of stock are purchased with a stock’s dividend payments. This strategy simplifies the investment process by allowing you to avoid brokerage fees in purchasing additional shares of stock. While you still pay taxes each year on the dividends received, the avoidance of brokerage costs results in a higher return.

 

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