Updated July 17, 2023
Definition of Investment Strategies
Investment strategy is made by the investors to plan their investment in such a way that they may earn maximum income out of the investment. The investment strategy should focus on the future needs of the company and thus tells the investors about the strategies to be made. The investors can analyze their goals and can make a focused strategy out of the same.
Investment strategies are made by the investors or by the consultants who are being hired to do the investment related planning. The investment strategy should be made on individual basis because each and every individual’s investment capacities are different and thus they have to make different strategies for their investment. Thus the appropriate strategies should be used for different individuals. Investors should note all the financial investment possibilities and the goals before making any investment strategy. If the strategy is made efficiently then there is no chance that the investor will fail. The investment strategy also includes the cost of living of an individual and thus it is decided by considering these factors.
Types of Investment Strategies
Following are the types are given below:
- Growth Investing: Growth investing is one of the investment strategies which are applied by the investor in case they are opting and focusing for the growth of their investment. This strategy focuses on the growth rate of the individual. The investment is made considering the growth rate of the investment policy.
- Active and Passive Strategies: These investment strategy helps investors in making a decision by focusing on active and passive investment policies. Some investment policies are non-moving and become stagnant after a certain period of time. Therefore detailed information is available for active and passive investment strategies and thus it can become easy for the investors to decide upon the investments to be made in the future.
- Value Investing: Value investing is different from the growth investment strategy. In this type of strategy, the value of the stock is given more emphasis. In this type of investment strategy. The stocks are being picked up which are showing less value than their intrinsic value because it is believed that the stock value is very sensitive and it can be changed by good or bad news spread in the market. Therefore some investors also take decisions based upon the value investing strategies.
- Income Investing: This type of investing strategy is based upon the income or returns from the investment. The income from the investment is a not always constant but the income or returns can be higher if the investment is made strategically. Therefore many investors who plan to invest as per the investment strategy and their goal is to earn income then in that case the investors can follow this strategy.
- Dividend Growth Investing: The finance manager is also concerned with the decision to pay or declare dividends. He assists the top management in deciding as to what portion of profit should be paid to the shareholders by way of dividends and what portion should be retained in the business. An optimal dividend pay-out ratio should maximize the wealth of the investors. The goal of the investor is to earn the dividend and thus this investment strategy is beneficial for the investors.
- Indexing: Indexing is also an investment strategy that also attempts to generate the market index rate of the investment. This is an index that shows the correct information regarding the investment strategies to be made.
- Buy and Hold: Buy and hold is also an investment strategy in which it is shown that the investors have a habit of keeping the stocks with them and then sell it as and when the price is up. This type of investors can be a long term investor as well as short term investors. They are active as well as passive. They are keen observers of the stock market and hence gain some knowledge out of their study.
Importance of Investment Strategies
- The investment strategy guides us for the investment decision to be made.
- The investors can set their goals and can analyze the risk factor associated with the investment strategy.
- The investment strategy also makes the investors cautious about the amount of investment they can make because in the case of preparing the investment strategy the inflation and the cost of living is also considered prior.
- The investors can make a quick decision after analyzing the investment strategy.
Some of the advantages are given below:
- The investment strategy can help investors make a quick decision regarding the investment to be made.
- The investment strategies can be goal-oriented and thus it can help the investors to make an investment decision as per their goals.
- The investors can reduce the risk which can be occurred after the investment strategy is made.
- The investors can also get a clearer idea of the future capital needs because in the investment strategy the focus is also on the appreciating of the capital of the investors.
- The investment strategy also helps in the wealth protection of the investors. The strategies are designed in such a way that the investors can take maximum gain from the same.
Some of the disadvantages are given below:
- The investment strategies can be very risky also. The investment strategies can make the investors realize that they can only invest in short-term investments but in reality, the stock market can change any moment, and thus it can deliver a wrong decision.
- The approach of the investment strategy can be limited. The stock market fluctuation is not considered while planning the investment strategy.
- The risk factor can also be sometimes being ignored in the case of Investment strategies and thus it can lead to a wrong decision.
- The investment strategy can be a drawback for the investors because certain important factors that are not constant can be ignored.
An investment strategy is a journey and not a destination. Investment strategies are always considered as an important tool that an investor can use to be on a safer side while investing. Whereas these investment strategies can be sometimes very risky for the investors because the price of the stock depends of several other factors that are practical than theoretical.
This is a guide to Investment Strategies. Here we also discuss the introduction and types of investment strategies along with advantages and disadvantages. You may also have a look at the following articles to learn more –