As a business owner who is looking for investors or looking to make a solid financial investment. It is important to remember that there is no “one size fits all approach”. Before deciding on how to invest your money, ask yourself if you are looking to make a long term or immediate gain. Companies looking for investors will be looking for specific kind of investors so be clear in what you are and what you’re not. Are you a risk taker or are you risk averse? How do you want your name to go down in the investor database? Once you have answered these key questions and have clearly ascertained your needs then it is time to familiarize with different investment styles and find out which one fits you:
Looking for Investors Who are Active Investors
If you have a high tolerance for risk and are looking to be an active participant in the market then an active investment style may be better suited for you. Used by investors who are more concerned with the present than the long term investment horizon, investing actively means selecting specific stocks and using market timing to seek short term profits. If you are already running a business that keeps you on your toes, active investing may not be the best option for you. This is because active investing requires you to be one the constant watch over the market to solidify your position. It also essential to keep track of other investor database to see how they may be fairing in the market.
Just like the name suggests, passive investing is better suited for investors who are risk averse. If you do not want to stare at market screens all day from your computer then you should be a passive investor. Not only will this give you the opportunity to wait in the sidelines and focus on your business, it will also allow you to gain long term results. As a passive investor, you are required to create portfolios that will track a market-weighted index and consult an investor database. By tracking, it will be easy to reduce risks and cut down on excessive turnover costs. Many companies looking for investors prefer passive investors. Someone who will let them execute their business plan without any involvement.
If your business earnings are growing rapidly, and are steadily on the rise then growth investing is truly a welcome option. You will be able to acquire stocks that are often times over valued or have high price earnings ratio. Growth investing should be directed to small companies with excellent growing potential. As such, it is best to look for investments in rapidly expanding industries such as technologies and services. There is no evaluation criteria when choosing a business to invest in often, it requires a degree of individual judgment. However, factors such as strong historical earnings growth, strong profit, strong return on equity and story stock performance.
While growth investing is about seeking out overvalued securities, value investing is geared towards undervalued stocks or those that are out of favor. Value investors expect these securities to eventually rise and buy stocks before they do. This gives them an opportunity to gain massive returns. This kind of investing does not require an extensive background in finance. With the common sense to invest, finances and a willingness to get out of your comfort zone then you can become a value investor. You simply need to know the true value of your investment and capitalize on it.
If you are hoping to select stocks based on the size of a company then you are using a market capitalization investing style. This involves multiplying the outstanding shares by the earnings. While small companies have a market capitalization of $2-$10 billion, larger companies go over $10 billion. Unfortunately even if the return for small companies is higher, the volatility is also durations. They boast of stability when it comes to dividends and returns. The figure for market capitalization is all about the total value of a company’s outstanding shares. For instance, a company with 20 million shares selling at $5 a share has a market cap of one billion.
Buy and Hold Investors
This investing style also falls under the umbrella of passive investing. As a buy and hold investor, you will enjoy long term growth. This investment strategy works even for those who hold passive portfolios. The underlying logic showcases itself in the fact that equities are riskier investments but holding over a long period of time may pave way for consistent returns. Ownership of stock in a buy and hold investment has its privileges including voting rights and partaking in decision making. In this case, investors retain shares but also bear the maximum risk of failure. This style of investing is very common and makes it easy to for companies looking for investors to work with these types of individuals.
Investors must be considerate of systematic or unsystematic risks. Systematic risk is a market risk that cannot be diversified away. However an unsystematic risk comes from investing in a particular company or sector. For instance, if you invest in the technology market only, you will experience high risk because of owning stocks. On the other hand, by diversifying your investor database and choosing to add or replace some of your technology company investments with consumer goods than your risk level will be reduced. This corporate strategy is best when entering a market or industry that the business does not operate.
Indexing is an investment style that involves creating an interior portfolio that mirrors a stock index company. Best-suited for those who are risk averse, this strategy is designed to match a market, not beat it. When done properly, it is often cheap and tax efficient. In other words, investors replicate the performance of a specific index by purchasing exchange-traded funds.
Figuring out how to effectively make an investment presents a number of challenges. But with these investment styles, you will get a clear idea of what you are getting into and what would be required of you as a business owner. Remember to constantly evaluate your options because your investment needs will inevitably change from time to time. Think carefully about where you stand in these investment and select your style carefully.