Common Approaches to Investing

There are ample ways in which investors can be classified. The most common ones are based on the amount of time an investor is willing to commit, the amount of risk one is will to bear and also, on the philosophy, which an individual chooses to follow.

Based on time

Determining the timeframe upon which one is willing to invest is relative and can mean several things to several people. Generally, long-term investors stay invested for at least 5 years, while a medium-term investor stays put for about a year or two. The time horizon that can be deemed short-term varies between 3 and 9 months, while traders enter and exit trades in a matter of just hours or days.

Based on risk appetite

The amount of risk an individual is willing to bear determines if one is a conservative investor (who exposes not more than 10 per cent-20 per cent of his capital to equities) or a balanced investor (who exposes about 40 per cent-50 per cent to equities) or an aggressive investor (who exposes a relatively higher amount of capital to equities i.e. 65 per cent-80 per cent)

Based on investment philosophy

Fundamental analysis deals with the study of the fundamentals on which a firm is built upon with the intent to identify its actual worth. As such, fundamental analysts make their decisions based on a company’s competitive advantage, its earnings and sales revenue growth, a company’s market share and product pipeline, a company’s financial reserves, and the quality of the company’s management. Technical analysts/investors rely on statistics to determine the behaviour of a stock by analyzing the market activity, primarily price and volume, which provide an insight into patterns.