By now we have a fair knowledge about the stock market basics. As we enter into the stock market, we will come across different types of investors. This article is designed in a way to give you a fair understanding of different investors in the market. We will also be looking at different types of investment strategies when picking stocks and how to select your investment strategy
An investor is a person or an entity that generates the capital required by many start-up businesses with expectation of receiving financial returns. There are commonly five types of investors.
Investment strategy refers to the principles that help investors achieve their financial goals. It guides investors’ decisions as per their goals, risk tolerance, and the future need for capital. These strategies could vary from a conservative approach to an aggressive approach. In a conservative approach, investors follow a low-risk strategy concentrating on wealth protection. On the other hand, in an aggressive approach, the focus is on rapid growth via capital appreciation.
Using these approaches, investors, based on their objectives and risk appetite, formulate their portfolios. However, strategies do not remain the same. It may change as per the change in the situation.
Strategies also depend on factors such as age, goals, lifestyle, financial situations, available capital, personal situations, expected returns, etc.
These are our top seven types of investment strategies.
1. Passive and Active Strategies:
Passive investment strategy refers to maximising return by minimising buying and selling. One of the most common forms of passive investing is index investing, where the investor purchases the benchmark index and holds it for the long-term.
An active investing strategy involves buying and selling assets actively in the hope of making profits and outperforming a benchmark index. Active investing takes a hands-on approach and requires a portfolio manager or other active participants.
2. Growth investing:
Growth investing is an investment style that focuses on increasing investors’ capital. Growth investors typically invest in growth stocks. These stocks are stocks of young & small companies whose earnings are anticipated to surge at an above-average rate compared to their industry or the overall market.
Growth investing is extremely attractive to many investors as buying stocks of emerging companies can deliver attractive returns to investors.
Growth investors focus on historical as well as future earnings growth, profit margins, return on equity and share price performance.
3. Value investing:
Value investing refers to the investment strategy that includes choosing stocks that trade below their intrinsic value or book value. Value investors look for stocks that they feel the stock market is underestimating.
There are several ways to calculate the intrinsic value of the stock. Some of them include price to equity ratio, price to book value etc. to identify value stocks.
In simple terms, value investing refers to finding bargain prices for stocks. For this, investors typically apply fundamental methods to find the intrinsic value.
4. Income investing
The income investing strategy is designed to produce funds for investors. The strategy focuses on generating cash income from stocks rather than investing in stocks and increasing the portfolio’s value. There are two sources by which investors generate cash income. These are dividend and fixed interest income from bonds. This strategy is preferred by investors looking for a steady income.
5. Dividend Growth investing:
In the Dividend Growth investing strategy, investors look for stocks that offer a dividend to the shareholders yearly. The stocks of these companies are consistently stable and less volatile than other companies. Further, these companies aim to increase the dividend payout every year. In this investment strategy, investors reinvest the dividend and derive the benefits of compounding over the long term.
6. Contrarian Investing:
Contrarian Investing refers to an investment strategy that involves bucking against the existing market trends to generate profits. The contrarian investors see buying opportunities in the stock selling below their intrinsic values.
A contrarian investor enters the market when others feel that the market is negative. For example, if the energy sector is doing well now and technology stocks are not, contrarian investors will likely sell all the energy stocks and buy technology. They believe long periods of underperformance can precede any positive change in the market sentiment. When the market sentiment changes finally, contrarian investors are in a better position to benefit.
Bill Ackman and Michael Burry are two famous contrarian investors.
7. Indexing:
Index investing is a passive investment strategy that tries to generate returns close to a broad index market. Investors following this investment strategy use a buy & hold strategy to imitate the performance of a specific index by buying the component of the securities within the index. Many investors also invest in index mutual funds or ETFs that track the underlying index.
Index investing is an effective way to manage the risk and gain consistent returns. As index investing takes a passive approach, the index funds usually have lower management fees and expense ratios than actively managed funds. Also, these funds are more tax-efficient than active funds as they make less frequent trades.
Index investing is also an effective way to diversify against the risk. These funds comprise of a huge basket of assets, and they serve to minimise the unsystematic risk related to a particular company or industry without decreasing the expected return.
In the case of index investing, one can ensure the portfolio achieves the same risk and return as that of the benchmark index by purchasing every stock in the index and in the same proportion or weight. However, it could be pretty expensive to implement.
An investment strategy is like a game plan to design your portfolio. However, it is important to find one such strategy that matches your investment goal and the situation of your life. The investment strategy also depends on the age of the person. A 25-year-old investor might have a different investment strategy than a 55 years old investor.
Some common steps one must follow while choosing the correct investment strategy. These are:
There are different investment types. However, below are some of the most common investment types. These are:
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