Investing in equities involves more than just picking shares or funds and deciding on markets. Investors, whether professional or not, typically have unique styles, strategies, and long-term goals influencing their decisions.
Some investors buy cheap shares hoping for a price rally, according to Barclays` Guide to Basic Investment. Others choose stocks already rising, aiming for further gains. The choice of strategy depends on financial goals, time horizon, and risk tolerance. While some investors stick to one strategy, many use different strategies over time. Investment strategies, like fashion, change with market conditions.
No investment strategy consistently outperforms the market annually, and all carry the risk of losing money. Investment values can fluctuate, potentially returning less than the initial investment. If unsure, seek independent advice.
Understanding different strategies benefits those with managed funds, as selecting managers with diverse strategies can lead to a more diversified portfolio.
Overview of Common Stock Picking Strategies
- Growth: Growth investors focus on rapidly expanding companies with strong profit growth. They seek features like consistent earnings growth, expanding revenues, and regular profit surprises. These companies often reinvest profits instead of paying dividends. However, high valuations can make them vulnerable if sentiment changes. The tech bubble of the late 1990s is a notable example.
- Momentum: Momentum investors buy stocks already increasing, betting they will continue to rise. This strategy relies on the ‘momentum effect’—stocks trending in the same direction for months. It can be successful, but trends can abruptly reverse, exposing investors to market corrections.
- Value: Value investors seek undervalued companies, aiming to profit when the market recognizes their worth. However, low share prices often reflect real financial issues or market challenges. The difficulty lies in accurately identifying true bargains and achieving high returns.
- Contrarian: Contrarian investors go against market consensus, requiring patience as they wait for a turnaround. This strategy often overlaps with value investing, demanding resilience when initial investments perform poorly.
- Income: Income investors prioritize dividend-paying shares from mature firms. This strategy focuses on securing income rather than capital gains and is seen as lower risk. High dividend yields can indicate undervalued stocks, making income investing akin to value investing.
Successfully following any strategy requires skill, knowledge, and experience, and none guarantees success. Always remember, past performance does not predict future returns, and investment values can fall, leading to potential losses.
For most, especially beginners, investing in a growth stock fund is a good start. Funds pool investors’ money, managed by professionals who select assets. Funds typically diversify investments, spreading risk. For example, a UK growth fund will invest across various British industries.
There are numerous funds, each with specific objectives. Some focus on UK blue-chip companies, others on the US or Europe. Many funds consist of a single asset type, like shares or bonds, while multi-asset funds invest in various assets, including shares, bonds, cash, and sometimes commodities.
