Investment style refers to different style characteristics of
equities
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
,
bonds or
financial derivative
In finance, a derivative is a contract that ''derives'' its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the "underlying". Derivatives can be u ...
s within a given investment philosophy.
Theory would favor a combination of big capitalization, passive and value. Of course one could almost get that when investing in an important Index like S&P 500, EURO STOXX or the like.
Also the degree of financial
leverage and
diversification
Diversification may refer to:
Biology and agriculture
* Genetic divergence, emergence of subpopulations that have accumulated independent genetic changes
* Agricultural diversification involves the re-allocation of some of a farm's resources to n ...
are also factors
Investor traits
The style is determined by
* the temper and the beliefs of the investor.
* some personal or social traits (
investor profile
An investor profile or style defines an individual's preferences in investment decisions, for example:
* Short-term trading (active management) or long term holding ( buy and hold)
* Risk-averse or risk tolerant / seeker
* All classes of assets o ...
) such as age, gender, income, wealth, family, tax situation...
* generally, its financial return / risk objectives, assuming they are precisely set and fully rational.
Some styles
Active vs. Passive
Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well. Passive investors, on the other hand, feel that simply investing in a market index fund may produce potentially higher long-term results. The majority of
mutual fund
A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICA ...
s underperform market indexes.
Active investors feel that the small-cap market is less efficient since smaller companies are not followed as closely as larger blue-chip firms. A less efficient market should favor active stock selection. The core-/satellite concept combines a passive style in efficient market and an active style in less efficient markets.
Growth vs. Value
Active investors can be divided into
growth
Growth may refer to:
Biology
* Auxology, the study of all aspects of human physical growth
* Bacterial growth
* Cell growth
* Growth hormone, a peptide hormone that stimulates growth
* Human development (biology)
* Plant growth
* Secondary grow ...
and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%.
Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their business cycle. A value investor is primarily attracted by asset-oriented stocks with low prices compared to underlying book, replacement, or
liquidation value Liquidation value is the likely price of an asset when it is allowed insufficient time to sell on the open market, thereby reducing its exposure to potential buyers. Liquidation value is typically lower than fair market value. Unlike cash or securi ...
s. There is also a diversification effect: Returns on growth stocks and value stocks are not highly correlated. By diversifying between growth and value, investors can help manage risk and still have high long-term return potential.
Small Cap vs. Large Cap.
Some investors use the size of a company as the basis for investing. Studies of stock returns going back to 1925 have suggested that "smaller is better." On average, the highest returns have come from stocks with the lowest
market capitalization
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by ...
(common shares outstanding times share price). But since these returns tend to run in cycles, there have been long periods when large-cap stocks have outperformed smaller stocks. Also, early on, small cap stocks had bigger premiums and were more expensive to buy and sell, but isn't easily captured in historical analysis, and in reality likely skewed total return for investors.
Small-cap stocks also have higher price volatility, which translates into higher risk.
Some investors choose the middle ground and invest in mid-cap stocks with market capitalizations between $500 million and $8 billion — seeking a tradeoff between volatility and return. In so doing, they give up the potential return of small-cap stocks.
Mostly taken from www.axaonline.com/rs/3p/sp/5044.html#what's
References
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Investment