Equities is a broad based investment category that cannot be mugged up in a year or so. Years of experience into the category provides insight into the asset class and like there is a basket of securities available to add to one's portfolio, there are also different investment approaches that are well suited for different market cycles or for different investor categories.
Here we will discuss 3 such investment approaches:
1. Momentum investing:
This investing strategy as per Investopedia aims to capitalize on a market trend i.e. seen to continue. Say for instance as is the current Indian market landscape which is trading near its all time high and still there is bullish outlook ahead, so tap the possibility of gaining in future course, investors can take on to momentum investing.
So, precisely it is going with the flow and capturing the current momentum of the market. This strategy is typically adopted considering a short term as the horizon.
Also the same applies to the time when the stock is going down in price and for it momentum investing suggests or pins hope that the stock will go down further in the price at least in the short run.
Typically, in India there are 2 benchmarks tied to momentum investing:
- Nifty200 Momentum 30 Index
- S&P BSE Momentum Index
Who can take on to Momentum Investing?
This is for all investors who see rising equity price as an opportunity and do not get discouraged by the same.
Disadvantage of Momentum Investing
While it can be advantageous during a market run and produce extra-ordinary returns for its investors, the same can be highly damaging in case of a correction. So, to say that in case of the market fall if investor happens to bet on a stock witnessing downside then the stock may even turn illiquid.
2. Value investing:
Again as per Investopedia, value investing looks for stocks that are trading below their intrinsic value or book value. Thus, value investors tend to add stocks that are being underestimated by the markets. The whole premise or idea here is that value investors believe that the current stock price are not in sync with the long term fundamentals of the scrip.
So, any bad news which has lowered the price of some fundamentally good stock is seen as an opportunity by value investors.
Parameters looked at when making value investing stock picks
In general value investor looks for stocks with either high dividend yield, below-average price-to-earnings (P/E) or price-to-book (P/B) ratio. This is because it is seen that history suggests that low price to earnings have typically outperformed. The downward risk in these stocks is also taken care of. Another criteria looked at is low price to book value and here lower price against the scrip's net assets is seen to protect the downside risk and hence attractive for value investors.
Likewise other crirterions chosen in the value investing strategy are stocks with low price in comparison to its cash flow, those with positive earnings outlook. Furthermore, value investors can also chase stocks which have been trading in a range after seing a decline.
3. Growth Investing:
It is an investment approach which aims to increase the invested capital and herein growth stocks are chosen which can be small or young companies with a potential to generate superior returns that the industry or the market as a whole.
This investment approach can be targeted to equities or may be booming companies' in the private space. Though there can be a risk attached, growth investing can also help in diversifying and can form a part of investor's overall investment strategy.
Typically a better earnings outlook or EPS for a company can held on decide it being a growth stock say if the company during the last year generated Rs. 100 per share but in the following year is seen to earn Rs. 250 then such a scrip will trade at a premium.
Few salient features of growth stocks:
1. They may not be paying dividend as tgey reinvest earnings for spurring business growth and further expansion.
2. They are seen to be expensive for buying and holding nonetheless growth investors pick on these stocks considering the high price as the cost of entry into the growth stock for years of growth ahead.
Who should go for growth investing?
Growth investing suits for those with some degree of risk appetite and also those they need to be patient with the market dynamics as growth investing will not provide with the gains on an immediate basis. So, investor also needs to have a longer investment horizon.