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What is Your Investing Style?    Bookmark and Share

This is one of the main questions to ask yourself before you begin investing. Some investors have very well-defined investing strategies and can answer this question very quickly and easily. Others don't have such a strategy and would struggle to answer this question. Regardless of where you fall on the spectrum, let's briefly take a look at some of the basic investing styles.

Do you like to buy stocks at a temporarily low price, and then sell them quickly within a week or two once the stock price has increased? If so, then you are not an investor at all. You are a trader. Traders like to look for short-term indicators that a stock's price is about to increase and then sell the stock when the stock's price has increased to a certain level.

Trading tends to be very speculative. It tends to be focused on charts and technical analysis. Traders do not typically study much about the fundamentals or financials of a company before buying stock. Some of the most notorious traders that you are probably familiar with are the day traders who traded tech stocks during the tech bubble of the late 90's.

On the other hand, if you are not a trader, then you must be an investor. Investors typically like to learn as much as possible about a company before buying stock and hold onto the stock for months, if not years before selling. There are two major categories of investors - value and growth investors. Although both types are widely discussed, their exact strategies or methods are not always understood. Let's outline some of the basic differences.

Value investing is similar to bargain shopping. Value investors tend to look for stocks of good companies whose stocks are temporarily priced lower than their intrinsic value. They use a number of metrics and ratios to determine whether a stock is a good value. They might use P/E ratio, book value, return on equity, or other metrics to determine if the stock is priced correctly.

Growth investors, on the other hand, are more focused on companies with accelerating revenue or earnings. They typically look at how quickly a company has grown over the past several years and analyze its trajectory. They examine different metrics than value investors, like the price to earnings growth ratio (PEG ratio) and revenue growth rate.

Since the goal for both major styles of investing is essentially to identify companies whose share prices are likely to increase over the long run, one could argue that there is no real difference between the two basic investing styles. In other words, a growth investor might real consider a stock a good value if they determine that it is selling at an attractive price compared to other companies growing at the same rate. Because there is not necessarily a clear conceptual difference between the two styles and there are merits to both styles, most experienced investors tend to look for both growth and value characteristics.

In conclusion, you probably know if you are an investor or a trader. If you are an investor, you may not be able to pinpoint your exact strategy. If you can't, don't worry. You have plenty of company. Coming up with an effective investing strategy is arguably the most difficult part of investing. However, if you take the time now to think about which investing style is best for you and refine your strategy, it can pay big dividends later.

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