6 investment styles – What is your style?

Investment styles refer to the way an investor carries out his operations, which can vary according to the criteria of each investor. But the truth is that we can categorize investment styles into three groups; about the type of management we apply, the size of the companies and whether they are part of the growth or value sector. Let's see then what types of investment styles we can define in a general framework and their main characteristics.

Active or passive management.

Investors looking for a careful selection of your assets are most interested in active management. Actively managed funds typically have a full-time staff of financial analysts and portfolio managers who They constantly seek to obtain higher returns for investors. Since investors must pay for the expertise of these personnel, Actively managed funds tend to charge higher fees than passively managed funds. Some investors doubt the ability of active managers in their search for superior returns. This position is based mainly on studies that show that, in the long term, many passive funds earn better returns for its investors than similar actively managed funds. Passively managed funds have an intrinsic advantage: By not requiring analysts, the fund's expenses are usually very low.

Small or large capitalization companies.

In order to categorize the size of a company we must look at its market capitalization. Market capitalization is the number of shares outstanding of a company multiplied by the share price. Some investors believe that small cap companies should be able to offer better returns because They have greater growth opportunities and are more agile. However, the potential for higher profitability of small cap companies carries a higher risk. Among other things, smaller companies cThey have fewer resources and tend to have less diversified lines of business. Stock prices can fluctuate much more, causing big gains or big losses. Thus, investors must feel comfortable taking on this additional level of risk if they want to realize the potential for higher returns. More risk-averse investors may feel more comfortable in most reliable large cap stocks. These companies have been around for a long time and They have become heavyweights in their sectors. These companies may not be able to grow as quickly as they are already so large. However, they are also unlikely to go bankrupt without warning. From large caps, investors can expect returns slightly lower than those of small companies, but also with less risk.

Investing in growth vs value stocks.

To determine which category a company belongs to, Analysts examine a series of financial parameters and they use their judgment to determine which label fits best. The growth-based investment style looks for companies with good earnings growth returns, good profitability of own resources, good profit margins and low dividend yield. The idea is that if a company has all these characteristics, it is usually innovative in its sector and makes a lot of money. Therefore, it grows very quickly and reinvests most or all of its profits to continue growing in the future. The value investing style focuses on buying a strong company at a good price. Thus, analysts look for a low P/E ratio, a low P/S ratio and, generally, a higher dividend yield. The main ratios of the value investing style show how this style cares a lot about the price at which investors buy.