2017-04-20 / The Motley Fool

Fool’s School

Styles of Investing

There are many ways to invest in stocks. It’s good to be aware of different kinds of investing and to know what your own style and preference is. Here are some key possibilities:

• Growth investing: Growth investors favor fast-growing companies and are willing to pay a lot for stock in them. They’ll often ignore steep P/E ratios and forgo a margin of safety, expecting stock values to keep rising as the companies grow. This approach is risky, as the stocks or the overall market might pull back sharply.

• Value investing: Value investing demands a margin of safety, as investors seek bargains, aiming to buy stocks for significantly less than their estimated worth. These investors focus on fundamentals of companies, such as cash flow, profit margins and dividends.

• Large-cap and blue-chip investing: These investors prefer large, established companies with proven track records of profitability. (Examples: Microsoft, ExxonMobil, Johnson & Johnson, FedEx, Pfizer, Visa, PepsiCo and Disney.) Such companies often feature dividends, too.

• Small-cap investing: Small-cap investors favor smaller, younger companies. These can be risky, as they may not be profitable yet, but they offer the chance of greater reward, as they can grow quickly. While small-cap companies can be more obscure and harder to research, they may also be easier to understand than many large caps, since they tend to be rather focused. (General Electric, for example, is involved in many industries, while the Craft Brew Alliance is mainly focused on beer.)

• High-yield investing: High-yield investors want income. They tend to focus on bonds and stocks with high dividend yields, including real estate investment trusts (REITs) and preferred stocks.

• Mutual fund investing: These investors like to park their money in index funds that track particular stock or bond indexes or in actively managed funds, where professionals choose what to invest in. Many managed mutual funds charge hefty fees and underperform simple, inexpensive index funds.

The styles above are not mutually exclusive. You may focus on undervalued small-cap companies, for example, or growth-oriented mutual funds. ¦

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