A glance at different investment styles for ASX investors

May 31, 2021 08:41 PM AEST | By Sonal Sinha
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  • Every investor has his/her own style of investing based on the objective of the investment.
  • The most common investment strategies include growth strategy, income strategy, value investing and small-cap investing.
  • Investors use fundamental and technical analysis to study the performance of any company's stock.

Every individual has a different approach to investing. No matter what the preferred style of investing is, it is essential to think about your goal. You must then assess which shares or any other financial instrument fit your investment portfolio.

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Questions you must ask yourself before investing in the market

Before deciding to invest in the market, you must ask yourself the following questions to get a clear understanding of why you want to invest:

  1. Why do you want to invest?
  2. What do you expect from your investment? Do you expect a return in the form of income, or capital growth, or both?
  3. Do you have the capacity to take the risk on your investment for the opportunity to generate higher returns?
  4. How would the investment fit your broader investment portfolio and the investment goals and strategy?

Different investment strategies

Growth Strategy

In the growth strategy, investors aim to invest in those stocks where they see a chance of solid capital growth instead of dividend. The strategy’s objective is to achieve share price growth at a rate above inflation.

Investors with a long-term investment plan and looking to develop a significant asset base generally prefer growth investing.

Growth investment involves investing in companies in rapidly growing industries or companies with a competitive advantage like a proprietary product or unique services. These companies continue to grow via the launch of new products, sales expansion, acquisition and many more.

Growth stocks have features like high EPS, high ROE, high PE ratio and low dividend yield.

Income Strategy

In income strategy, investors seek high dividend payments. The strategy involves opting for investments designed to provide a steady source of income over a specific period in the form of dividends, bond yields and interest payments. It is a popular means to chase decent returns.

Generally, income is produced by large, stable, and profitable companies. These form a base for nearly every investor’s portfolio.

Value Investing

Value investment strategy includes buying cheaper stocks. In this process, investors look for underpriced stocks and involve extensive research on the underlying company's fundamentals.

Small-Cap Investing

Small-cap investing strategy involves investing in stocks of small companies with smaller market cap. Investors with more risk appetite. These stocks look attractive to investors due to their ability to grow significantly. On the other hand, large-cap stocks have inflated prices as most investors look at these stocks.

Generally, small-cap investing strategy is preferred by experienced investors because these stocks are volatile.

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How do investors analyse the performance of shares?

There are different ways through which an investor analyses the performance of any company's share. However, the methods fall under either of the two categories mentioned below:

  • Fundamental analysis
  • Technical analysis

Fundamental Analysis

Fundamental analysis involves looking at business fundamentals, future outlook and financial statements and specific ratios. It also looks into the Company's financial position and performance, the market in which the Company operates, its competitors and the economy.

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Investors use financial statements, including balance sheet, income statement, and cash flow statement, to calculate the ratios and metrics that tell about the Company's performance, health, and growth rate. Other factors like interest rate and retail spending are also used to forecast future growth rates. Based on these data, investors derive the fair value of the Company.

Technical Analysis

Technical analysis involves looking at the past price movement of any particular stock or the market as a whole. Analysts use price charts and statistics while conducting a technical analysis. It involves using  different tools like moving averages, RSI, oscillators calculated from stock prices, and many more.

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