Are you looking to invest your money in the stock market or any other securities market where you hope to get returns that would help you beat inflation? If the answer is yes, then there are a few things that you need to know. The first such thing is that in investment there is no single approach that would be the right fit universally. Something that works for you may not work for another person and vice versa. There are a few questions that you have to ask yourself in this context before you take any decision in this regard. This will help you find out the right investment approach that would be the best fit for you.
You can also be sure that it is this approach that would help you reach your goals as an investor as well.
1. Active investment
The most prominent style of investment is the active style of investment. However, to be able to be an active investor, your risk tolerance levels should be higher. You should also have a keen interest in being an active participant in various markets at the same time. Active investment is normally for people who are not always bothered by what is going to happen in the long term. Active investors always choose some selected shares and use tactics such as market timing to perform better than the market. Their main aim is to make profits in the short term.
If you want to be an active investor you always need to keep a hawk eye over the proceedings of the stock market. You also need to be aware of your position in the market.
2. Passive investment
This is the type of investment for you if you are someone who does not like taking risks, and also does not wish to spend time looking at computer screens throughout the day. Passive investors are normally people who would invest their money for the long term. The passive investor never attempts to time the market. Rather she or he creates portfolios that keep track of a portfolio or index that is market weighted by nature. When as an investor you track an index it reduces your risk profile considerably. Much of this happens because of diversification.
The costs of the transaction, in this case, are lower as well because the turnover itself is low.
In this style of investment, you would be focusing on shares of companies whose income is always growing at a rate that is faster than others. These are also ones that are expected to perform this way for a long time to come. Quite often these stocks are called overvalued stocks. In most cases, they have a high ratio of price to earnings. It is important to keep in mind in this context that these stocks yield very low dividend or none.
Value investors are unlike growth investors in the sense that they are not after overvalued securities. They are always looking for stocks that are either undervalued or out of favour as such. They normally expect that these investors would one day perform well and they wish to buy them before it actually happens.
5. Market capitalization
If you are using the style of investment known as market capitalization you are basically choosing shares by the organization’s size. This style of investment is also known as the market cap style. In this case, the calculation is done by multiplying the number of outstanding shares with earnings provided by each share. In the case of small-cap companies, the figure of market capitalization could be between 300 million dollars and 2 billion dollars. In the case of mid-cap companies, this figure could go up between 2 billion dollars and 10 billion dollars.
As far as the large-cap companies are concerned the market cap figure is beyond 10 billion dollars. The small-cap stocks are normally supposed to have a higher degree of risk compared to the large-cap ones. They may provide you higher returns, but they are a lot volatile as well. The large-cap companies, on the other hand, are ones that provide you with a lot more stability because they have been there for a long period. A lot of market cap investors use the large-cap stocks because of this stability factor and the dividends that they provide.
6. Buy and hold
This particular style of investment can be called a kind of passive investment as well. Such an investor does not really trade that often and is mostly bothered with achieving growth over the long term.
This is also a form of passive investing and one that is fairly popular as well. In such a style of investment the investor normally makes a portfolio that is exactly like the companies listed on a certain stock index. This portfolio will normally perform just as well or poorly as the index in question does. If you are averse to taking risks with investment, then this is the right choice for you. Since such portfolios are so diversified, they carry pretty low levels of risk. Normally you do not need to pay a lot of tax or transaction related costs for managing such a portfolio. This is because in these portfolios the rate of turnover is really low.
As an investor, there are two kinds of risk that you need to be worried about – unsystematic risk and systematic risk. Systematic risk is a market related risk, and there is no way you can reduce it with diversification, no matter how well it is done. Unsystematic risk, on the other hand, is a kind of risk that you take when you invest in a certain company or a sector as such. You can always address such risk through diversification. Normally when you are investing in just a single sector, you are basically taking a lot of risk. However, when you diversify you can reduce your risk levels significantly.