Most Popular Investment Theories

When it comes to investments, there are also popular theories that influence the market. It is also possible for other investors to create their own theories on investing success. Here are some of the most popular investment theories.

50% principle. This theory is usually applied in short term investments. For instance, if you made 50% stocks and there was an upward trend in the market, most likely you will gain 30% and loss 10%.

Greater fool. This theory means that you can gain great profits if you buy an investment at a higher price. Looks like a greater fool as the name of the theory states right? Investors believe that you could make a lot of money on a high-price investment as long as there is someone who is willing to buy that investment for you. You may overprice and it can give you great profits, only if someone is interested to buy in—and that’s risky.

However, reality is there are actually a lot of first-time investors that are fooled with overpriced stocks which also made long-time investors get even richer, so it turns out that new investors have to watch out for greater fool investments and pay attention to data behind such overpriced investment you are considering to invest your money.

Efficient market hypothesis. EMH or efficient market hypothesis states that a stock is valued until something changed the valuation of the stock or the investments. Investors see that economy’s future is uncertain; which means you do not know when an investment could be very rewarding. With that said investors opt to own and invest in a lot of stocks with the hope that there will be market rise in the near future, which will lead to greater profiting at their end.

Rational expectations. This is different from EMH. Investors act as to what they see is what to expect in the future. An investor will only spend for an investment according to what he “rationally” believes will take place in the future. If the investor notices that a stock is undervalued, he will buy it; other investors will also buy in since they noticed him buying an undervalued stock. If a lot of investors are influenced to buy that undervalued stock, then its market price will push up.

In the world of investments, change is only constant. Whether these theories are feasible or not, it is for you to find out. Of course, when you will have enough of experience of your own, then you will be needed for theories of other, but in either case it won’t be worse if you will be aware about them.

Another important thing is that theories are for theoretic. If you want to make real money in stock market you need to have enough of practical experience because you won’t have enough of money to try all the theories on the world!