In the stock market, investors choose different investment styles based on how much risk they can take and what they want to achieve financially. Since each investment style comes with its own level of risk and investment horizon, a strategy that works for you may not necessarily be suitable for your spouse or parents.
Therefore, starting your investment journey with a style that suits you can be a good idea. To help you understand which investment style may be right for you, we have explained seven investment styles below. You can choose one based on your goals and risk tolerance.
Active Investing
Active investors primarily aim to generate higher returns over a shorter period. Intraday trading is one example of active investing. These investors buy and sell financial securities throughout the day to take advantage of market movements and earn profits.
Active investing relies heavily on technical analysis for decision-making. Technical analysis helps identify market trends and track stocks in order to estimate the possible direction of future price movements.
Passive Investing
A passive investor usually focuses on long-term goals. Instead of trying to beat the market, the investor looks to build income over time or earn steady returns in the long run.
In simple terms, the objective of passive investing is to build wealth gradually. This is why it is also known as the ‘buy-and-hold strategy’. Passive investing means buying securities and holding them for a long period. Unlike active investors, passive investors do not aim to earn profits within a short time frame.
Value Investing
Value investing is about identifying undervalued stocks that have the potential to deliver better returns. In value investing, investors look for stocks that are trading at lower valuations, buy them, and expect their prices to rise over time so they can be sold at a profit. Warren Buffett is one of the most well-known investors associated with this style.
One important risk investors need to be mindful of in value investing is the ‘value trap’. These are companies that appear undervalued but are not so in reality. Value traps can be risky because their prices may not rise over time and can even decline further.
Dividend Investing
Dividend investors invest with the objective of generating regular income from dividends. A dividend is a portion of a company’s profit that is distributed to shareholders. Companies that pay dividends are usually more mature and stable compared to emerging companies that are still in their growth phase.
When a company earns profits in a financial year, it generally has two options: reinvest the profits into the business or distribute a portion of the profits to shareholders as dividends.
Growth Investing
Growth investors are interested in companies that have strong growth potential. Investing in growth companies can be attractive because these businesses tend to expand rapidly over time. Such companies generally do not pay dividends, as they reinvest their profits back into the business to support growth. However, this can be beneficial for investors if they buy the stock at a lower price and sell it later at a higher price.
Market Capitalisation Investing
Market capitalisation is a way to measure a company’s value, based on the number of outstanding shares and the price per share. Investors who use market capitalisation as their investment style focus on specific segments such as small-cap, mid-cap, or large-cap companies. Some investors may also invest in micro-caps, penny stocks, or mega-cap companies.
This investment style can offer varying levels of risk and return depending on the investor’s preference. For example, large-cap companies are generally better suited for dividend income, while small-cap companies may offer higher growth potential or better returns on investment.
Index Investing
Index investing is a type of passive investment strategy. Instead of investing in individual stocks, index investors invest in a specific index such as Nifty 50, Bank Nifty, Nifty IT, Nifty Pharma, or Nifty 500.
Index investing is often chosen by investors who are bullish on a particular sector and believe that the sector can perform well in the future.
How to Choose an Investment Style?
Choosing an investment style begins with understanding a few key factors, such as:
- How long you plan to invest.
- What your investment goals and objectives are.
- How much risk you are willing to take.
Your risk capacity, or the level of risk you need to take to achieve your investment goals.
Once you have answers to these questions, you can decide which investment style suits you best. Additionally, the following points can help you make a choice:
- If you have a higher risk tolerance and expect better returns over a short period, you may choose an active investing style.
- If you are planning to invest for the long term, you may consider passive investing or market capitalisation-based investing.
- Value investing and growth investing are suitable options for investors who are willing to research companies thoroughly and aim to generate higher returns.
- Dividend investing is a good option for investors who want to invest in companies that pay higher dividends and earn regular income through dividends.
- Index investing is commonly chosen by investors who are bullish on a particular sector or the overall economy and believe it can deliver better returns in the future.
*The article is for information purposes only. This is not investment advice.
*Disclaimer: Teji Mandi Disclaimer
