Not every investor is cut out of the same cloth. Similar to fashion, investing has many styles and as with clothing, one not need to adhere to any one style, although, usually investors do gravitate toward one mode or another. Below is a look at the various investment styles, and how they work for those investors using them.
Understanding one’s primary investing style could reveal how best to invest in the future.
Some people start out in the market the same way their families did, or perhaps a trusted friend gave them the advice to go such and such route. Similar to fashion, investment style is often mimicked, but is it always to an individual’s advantage? Of course, not everyone looks good in everything, the same is true with investments. Certain investment styles just work better for some than others.
The active investing style is for those who are comfortable with the fast lane.
Similar to performance sports apparel, active investors are ready for action. Active investing is for those investors who enjoy checking in with market fluctuations several times a day, and are more focused on the present than what lies ahead in the future.
With a higher tolerance for risk, active investors choose certain stocks and work with market timing to try to outperform the market to realize short-term profits. Active investors get little rest from their portfolios as they are constantly vigilant over their stock market positions.
Because investors are often buying and selling to wring the most out of market trends, investing fees may be smaller, but they could add up due to the number of trades.
The passive investing style is for those who want a more relaxed approach to choosing which stocks to invest in.
Like sensible shoes and a button-up shirt, passive investing is tailored to people who tend to be more risk-averse. Passive investing focuses on long-term investments; investors are not interested in moment to moment hand-wringing, worrying about market shifts.
Passive investors build portfolios that follow a market-weighted portfolio or index. With diversification in tracking indexes, the end result is usually reduced risk with lower transaction costs in light of reduced stock buying and selling.
Investors looking for stocks to buy within a quickly growing company are interested in the growth style of investing.
The latest sports watches are, like many growth stocks, innovative. Growth investors zero in on stocks that are making lots of money, faster than the majority of other stocks, with an expectation of continued growth. Growth investors seek out stocks that have high-profit margins, high return on equity, and high earnings growth rates.
Commonly referred to as overvalued, the growth investment style generally has low dividend yields. This is do to most, or all of its earnings being reinvested back into the company to further future growth.
The value style of investing is how to buy stocks that are undervalued or less popular.
A winter coat may not be the flashiest garment in the closet, but like value stocks, it certainly is a valuable thing to own. Value style investors hone in on purchasing solid companies at reasonable prices. Usually offering higher dividend yields, value investments present a low price to sales ratio, and a low price to earnings ratio.
The main ratios for the value investment style illustrate the emphasis on the buy-in price for investors. Value investors are banking on their investments rising, and look to buy them prior to their value increases.
People most comfortable with finding stable low-risk stocks to invest in should consider the large-cap investing style.
A vintage bag or briefcase is always in style as are dependable large-cap stocks. Large-cap style investors favor investing in the well-known leaders of industry such as Microsoft, Exxon Mobile, and GE. Large-cap companies have weathered the course of time and become behemoths in their markets. Because they are already giants, they likely will not grow quickly, instead, their rise is reliably slow and steady.
Large-cap investments offer lower returns on dividends than some investment styles, but they are less risky as their well-established firms are not likely to go out of business overnight.
The small-cap investment style is for investors who seek stocks to invest in with untold growth potential.
A statement accessory or bold tie can be a little risky, but like small-cap stocks, they can have a wealth of possibilities. Small-cap investors go after companies that are on the rise, more nimble with plenty of opportunity to grow.
Small-cap firms generally are less diversified in their businesses and have less money to fall back on should the road get bumpy. Substantial gains and losses can be common therefore small-cap investors should be certain of the level of risk they take on when they choose to follow this path toward perhaps sizable returns.
Employing a diversification investing style is how to invest for lower risk stocks.
Just like owning one type of stock, in one industry, having only one outfit is dicey. A diversified portfolio with stocks from several industries offers investors reduced risk with a greater potential for profit.