How you fare at investing depends on how you look at investments, what type of returns you want and how much risk you are willing to take.

From there, you will develop your own investment philosophies and styles, and apply them to your decisions to generate the most optimal returns.

Thus, understanding different investment styles in the market could help you develop and improve on your own style.

Growth investor

This type of investor focuses primarily on investing in up-and-coming companies that are riskier than regular investments. This is similar to how venture capitalists invest in any promising startups.

Many times, growth investors don’t mind buying investments that are expensive. Expensive here means that the valuation for the investment is very high, where most investors will use financial indicators such as price earnings ratio to analyse them.

Growth investors look specifically for small companies at their initial stages, which normally are not making much profits at the moment and trades at high valuations. Their bet is that in the future, their returns could potentially be higher than the industry returns.

Value investor

A value investor specialises in identifying and investing into undervalued investments in the market. Undervaluation happens when investors in the market do not understand the true value of the investment and oversell it way below its fair value.

Value investors routinely identify these opportunities when the market becomes too fearful of certain events, and sells excessively on emotion. As a result, the price earnings ratio goes below 10 times (companies normally trade at 13 to 15 times) and presents value investment opportunities.

Of course, value investors do extensive research into their historical financial performance and company news.

Top-down investor

Top-down investors look at investments based on the big picture and how it translates to making investment decisions. These types conduct rigorous analysis on the broader economy and see how it is faring.

Top-down investors typically invest according to what the overall economic indicators are showing. For example, you might be focusing more on manufacturing companies now as the sector has recorded the highest growth among other sectors in 1Q 2021. If China is doing very well now, you might want to invest in companies that primarily export products to China.

Top-down investors are primarily influenced by what the overall data in the economy is showing. Economics knowledge and a bigger picture view is important here for a top-down investor, which forms the basis of investing decisions.

Bottom-up investor

This type is in direct contrast to a top-down investor. A bottom-up investor begins by choosing a set of investments and conducts a 360-degree research on them. This encompasses studying the very basics of what a company does, all the way to their future prospects and risks.

From there, they will narrow down their investments to the best characteristics and further analyse the ins and outs of the companies, such as board member strength, management quality, and internal process controls.

Once they have identified these investments, they will normally hold them for a much longer time period as they know the investments inside out and are confident that they will perform well. This is similar to a growth investor, but bottom-up investors also invest in established companies that have solid fundamentals.

Opportunistic investor

An opportunistic investor, also known as a cyclical investor, is similar to a top-down investor but differs in the sense that they are very quick and opportunistic in identifying hot sectors.

While a top-down investor would use the overall economic data to identify promising investments, an opportunistic investor would do that too but they would take it a step further by taking advantage of irrational market movements caused by emotional and speculative investors.

For example, the bullish glove stock markets of 2020 had a fundamental reason for people to buy but soon, it turned into a mere craze. The opportunistic investor essentially will get in at the beginning of this craze, riding the euphoria of investors and selling when the hype dies down.

As you can tell, these investors do not actually need to understand the fundamentals or the fair value of these investments that much. Following the market is the mantra here, and they are always on the lookout for these kinds of opportunities in the market.

Day trader

This style of investing is vastly different from the rest, day traders are primarily focused on trading on movements in random prices. They don’t really look into the fundamentals of the investments, but rather try to profit from the seemingly random price movements on the market.

A day trader’s investment horizon could be as short as three minutes or as long as six to seven hours in a day. Day traders typically look at technical indicators such as moving averages, Bollinger bands, relative strength index, and others to identify price trends.

Day traders try to predict price behavior and take a corresponding position. They don’t actually seek to understand why prices move but rather just analyse how likely it will, based on the past price data.

Day trading is inherently the most riskiest out of the investing styles here but if done right, you can effectively manage your risk properly.

Swing trader

Similar to a day trader, swing traders predominantly trade past the day to possibly extend to a few weeks. Swing traders usually analyse longer historical price movements and data. They also pay attention to what is happening in the news more closely.

Generally, swing trading is more suitable for people who have higher capital to trade as they are exposed to much more volatile movements. However, a swing trader could also adopt the investment style similar to an opportunistic investor, by trading on trends that last for more than a day.

The one differing characteristic here is that swing traders utilise technical price data instead to determine their entry or exit points.

As you can see, investment styles are actually based on your personality and financial goals.

Different styles will suit different people, hence it is important that you understand who you are and what styles suit you the best. Happy investing!

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.