Investment style,[1] is a term ininvestment management (and more generally, infinance), referring to how a characteristicinvestment philosophy is employed by aninvestor orfund manager.[2][3]Here, for example, one manager favorssmall cap stocks, while another prefers largeblue-chip stocks. The classification[1][3] extends acrossasset classes —equities,bonds orfinancial derivatives — and within each further weighs factors such asleverage,momentum,diversification benefits,relative value orgrowth prospects.
Major style choices include the following:
- Active vs. Passive:Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well.Passive investors, on the other hand, feel that simply investing in amarket index fund may produce potentially higher long-term results (pointing out that the majority ofmutual funds underperformmarket indexes). Active investors feel that a lessefficient market (prices inhering all news, and hence potential) should favor active stock selection: for example, smaller companies are not followed as closely as larger blue-chip firms, and may then trade at a discount to true value. Thecore-/satellite concept combines a passive style in an efficient market and an active style in less efficient markets.
- Growth vs. Value: Active investors can be divided intogrowth and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%.[citation needed]Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of theirbusiness cycle. A value investor is primarily attracted byasset-oriented stocks with low prices compared to underlyingbook, replacement, orliquidation values. These two styles may offer adiversification effect: returns on growth stocks and value stocks are not highly correlated, thus by diversifying between growth and value, investors may reduce risk and still enjoy long-term return potential.
- Small Cap vs. Large Cap: Some investors use thesize of a company as the basis for investing. Studies of stock returns going back to 1925[citation needed] have suggested that "smaller is better," and on average, the highest returns have come from stocks with the lowestmarket capitalization, the so-called "Size premium". At the same time, small-cap stocks have higherprice volatility, which translates into higher risk.[4] (Also, there have been long periods when large-cap stocks have outperformed.) Some investors then choose the middle ground and invest inmid-cap stocks seeking a tradeoff between volatility and return.[1]
