How aware are you of your investment styles? Do you know how tolerant you are to risk, and how do they influence your investment choice? If you are like most investors, chances are you have not put much thought into it.
With the wide available choice of investments in today’s market, having bit of awareness on what your traits and qualities are when it comes to investing can be helpful in making sound decisions that work for you. Whatever investment style you choose, remember that each has its own advantages and disadvantages.
If you have high tolerance for risk then you are probably an active investor. If you are hands on and like to be in control while participating in the market then this type of investing style definitely tickles your fancy.
The active investor is one who likes to actively keep tabs with the market, monitoring how it is performing even multiple times a day and taking advantage of the short term price fluctuations.
Active investors are highly involved in the day to day movement of stocks, and are typically in it for short term profits and gains, rather than potential long term appreciation.
The advantage to this type of investing is that it allows for individuals to take advantage of short term trading opportunities with swing trades typically happening between two to six days, and can last as long as two weeks.
The downside to this, however, is active investing can be a costly affair due to more frequent transactions, this especially so if you have an investment manager. It is an approach that needs precision and accuracy. You really need to know what you are doing, and must get it right more times than get it wrong, or else it could cost you.
If you want to invest for the long haul, then you are the passive investor. Passive investor is not quick to sell, and is patient. A passive investor is one who prefers not to get immersed too much into risky transactions, preferring to wait out the returns.
This type of investing requires a buy and hold mentality and resisting the temptation to react or anticipate the stock market’s every move. Investors who want to be successful in this type of investment needs to keep the eye on the price and simply ignore the short-term setbacks.
The advantage of this type of investment is that it does not cost too much to access the market. If this is the way you want to go, be sure that you are okay with locking your money somewhere over a long period of time.
GROWTH OR VALUE INVESTING
The growth style of investing focuses on stocks of companies whose earnings have been seen to be growing more rapidly than other stocks, and whose growth prospects show that they will continue to grow.
These stocks, however, are often overvalued and have a high price to earning ratio and generally pay either low or no dividend. On the flip side if done correctly, it has the potential to take advantage of a company whose earnings are increasing rapidly.
Value investing on the other hand are for investors who look for stocks that are undervalued. Typically value investors seek to invest in securities that they believe will rise, and buy them long before they do. The disadvantage to value investing is if the securities continue to go on a downward trend, you stand a chance of losing a lot of money.
The market capitalisation investing style are for investors who select stocks based on the size of the company. This type of investing can generally be split into two, the investor that prefers to go for small cap companies, or those who prefer to invest in large cap companies.
Investors who prefer to invest in small cap companies do so because they believe being a smaller company, there are greater opportunities for growth and agility.
This said, investors who want to go this direction must be aware of the risks involved. Smaller firms have fewer resources and often have less diversified business lines.
Their share prices are also vulnerable to vary more widely thus causing large gain or losses for that matter. It’s therefore advised that investors who want to go down this path should do so taking into account the additional risks that come with it. There are other investors who favour large cap companies because of the stability it offers.
Large companies have grown enough to own a sizeable marketshare, and have a steady cash flow. They are therefore less likely to be swayed by shocks.
Another advantage to investing in large size companies is the amount of public information made readily available which make it easier for your research to inform your investment choice, and you get to avoid any surprises along the way, with its long history of performance made readily available to you.