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Concept
Investment style
Summary
Investment style, is a term in investment management (and more generally, in finance), referring to a characteristic investment philosophy employed by an investor.
The classification extends across asset classes - equities, bonds or financial derivatives - and within each may further weigh factors such as leverage, momentum, diversification benefits, relative value or growth prospects.
Major styles include the following, but see also and .
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 (pointing out that the majority of mutual funds underperform market indexes). Active investors feel that a less efficient market (prices inhering all news, and hence potential) should favor active stock selection: for example, smaller companies are not followed as closely as larger blue-chip firms, and may then trade at a discount to true value. The core-/satellite concept combines a passive style in an efficient market and an active style in less efficient markets.
Growth vs. Value: Active investors can be divided into growth 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 values. These two styles may offer a diversification effect: returns on growth stocks and value stocks are not highly correlated, thus by diversifying between growth and value, investors may reduce risk and still enjoy long-term return potential.
Small Cap vs. Large Cap.: Some investors use the size of a company as the basis for investing.
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