There are many different investment strategies available and they are often executed differently. Which strategies you use and how you use it will depend on your personal preferences. It will also depend on your goals and risk levels.
To simplify it you will find below a brief description of 3 key strategies.
VALUE INVESTING OR CONTRARIAN INVESTING
A value investor is someone who is looking for a company that is trading below their true value. This can also be know as intrinsic value or fair value. This investment strategy is about buying quality companies at a discount price. The hope then is the price will catch up with fair value. This allows you to sell at a much higher price.
This type of investing requires you to understand the fundamentals of a business. You want to understand what the true value of the company is vs it’s stock price.
People also often use the term Contrarian Investor. Contrarian investors look to take advantage of major market down turns such as in war time or recessions for example. A contrarian can also be described as someone who goes against the norm. They will buy when the majority are selling and vice versa. There is a famous quote from Warren Buffett “Be fearful when others are greedy and greedy when others are fearful”.
Some people identify a Value Investor and a Contrarian Investor as two types or investor. However, the principle is the same as they both look for good companies that are undervalued in the market place.
Income investors are looking for stocks that pay strong dividends or income bonds. The idea is to generate regular income from your investment rather than looking for big movements in price.
These companies tend to be larger companies that are not necessarily growing at a rapid rate anymore. They tend to be well established with consistent profits and free cash flow that they share with the shareholders.
There are two types of income investing. The first is the where the investor uses this income as part of their living income. The second is where the income is reinvested back into the markets. This can be with the same company or a different one. It is referred to as compounding which is a very powerful way of investing for the long term.
Growth investors look for companies that are growing fast or significantly. The plan is for the company to grow considerably more over the coming years along with the stock price.
Growth stocks can often trade at a much higher prices as they are priced for their future potential. This can result in large price increases if a company delivers big growth. However, you need to be careful as failure to deliver can significantly hurt the stock price.
Growth companies often do not pay dividends as all their profits are invested back into the business for future growth.