Types of Investments Explained: Stock selection refers to the process through which a proper and systematic analysis is done to pick up the best stocks one could add to their portfolio based on theirs. There are several investment styles and strategies which investors can use to build up an optimal portfolio.
Types of Investments, a range of parameters is considered like the company’s size, sector performance, the P/E ratio, dividend history, etc. An ideal portfolio will be one that has a mixture of different stock types and investment strategies.
By incorporating different strategies, diversification can be achieved. In this article, we go through a range of equity investment strategies that are currently being employed by investors. Without further ado, let’s have a look at the different investment strategies.
Types of Investments Explained
This article will try to make you various Types of Investments Explained, Keep reading to find out more.
1. Growth Investing
Growth investing is one of the most popular investing styles. This investing approach means buying stocks that are attached to businesses having characteristics that their competitors lack. The measurable characteristics of these businesses include above-average growth rates in revenues or profits, etc. There also exist non-measurable factors here like brand value, repeat customers, etc.
Growth companies refer to organizations that have demonstrated solid gains in earnings recently and which are expected to continue to deliver these high levels of profit growth. However, they don’t have an established history of solid growth in earnings.
In a nutshell, growth investors favor investing in typically young companies having a high P/E ratio, and these investors tend to rely on significant capital gains or stock price appreciation. These companies avoid paying dividends as they re-invest excess cashflows in their growth strategies.
2. Value Investing
Value investing refers to an investment strategy that focuses on picking up stocks that appear to be trading below their intrinsic or book value. The value investors are the believers that the market overreacts to extremely good or bad news. As a result, stock price movements don’t correspond to the long-term fundamentals of the company.
These investors tend to exploit this opportunity, and they go long on the quality companies for the long term. Value investing means investing in well-established companies having low P/E ratios. These companies have a solid track record of dividends.
3. Dividend Investing
Dividend investing refers to a strategy that focuses on buying stocks that pay regular and consistent dividends. This strategy is suitable for investors who prefer receiving a regular income stream from the investments. This investing style is suitable for investors with a low-risk appetite. The companies in this investing style are renowned and have healthy dividend yields.
4. Contrarian Investing
Contrarian investing means an investment strategy in which investors intentionally go against the current market trends. In short, this investing style means “selling at the time when others are buying”, and “buying when others are selling”. The herd mentality always stays in the equity markets.
Several investors share the consensus that the market is doing well and should keep going up, or that the market seems to be in trouble and should be lower tomorrow than today. Contrarian investing refers to maintaining a viewpoint that is out of favor. Contrarian investors than do their research and assess an investment opportunity.
5. GARP Investing
If you’ve read the above-mentioned growth and value investing strategies, and found yourself somewhere in between, then you should go for GARP investing. GARP, Growth at a Reasonable Price, is an investing strategy that combines attributes of both growth and value investing. These investors are on the lookout for the stocks that are trading for less than their estimated value but have earnings growth higher than the average market levels.
6. Deep Value Investing
Deep Value investing strategy is an extreme version of value investing. This strategy means holding stocks of the companies having extremely low valuations. In most cases, these companies are out-of-favor or these companies belong to those industries which are particularly out of favor. In deep value investing, there are two elements:
- The large and significant margin of safety
- Conservative valuation approach
Types of Investments Explained with deep value investors tend to make money by finding stocks that the market has mispriced by a significant margin i.e., larger than the market should have. Most of the investing types have been explained in this article. Investors need to employ a mix of these strategies to come out with an optimal portfolio.
This goes without saying that an appropriate investment strategy is the one that is selected according to the risk profile. For some investors, only one investment strategy is required, while some investors require a blend of different strategies.
If you’re new to the stock market and don’t know where to start, there are a few good online courses you can take. FinGrad has introduced a value investing course in educating you on analyzing and evaluating different firms.
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