Investing in the stock market can be a sophisticated endeavor, and it is not always as straightforward as buying and selling securities, which are stocks that are traded for a profit. By adopting an investing style, investors of all types can apply a method that historically has proven to be successful and technically makes sense on paper. Adhering to an investing style is a strategy that provides some guidelines for choosing from millions of stocks and removes some of the risks associated with random stock selection. Such strategizing has worked for many prominent investors, including the likes of Warren Buffett, who built the Berkshire Hathaway empire, but there are no guarantees of success when investing in the stock market.
There are multiple methods of investing that can be used. Bottom-up investing is one such investing style. In this stock selection method, an investor looks beyond some of the more obvious criteria when choosing investments, including the industry group in which a security trades and other macro-economic trends that are known to move the stock market. Instead, this investing style recognizes trends such as a solid executive management team and an effective business model that generates steady cash flow on the balance sheet. Investors using this strategy often must perform extensive homework on a potential investment, because broad-brush industry trends do not cooperate when selecting unique characteristics that apply to bottom-up investing.
Focusing on large cap stocks is another investing style. Large cap stocks represent a grouping of some of the largest companies in the financial markets based on market capitalization, a measure of the value of a company based on the price of an individual share multiplied by the number of shares that are available for trading in this particular stock. By hand-picking large cap securities, investors are betting that companies that are leaders in their respective industries will introduce stability to an investment portfolio. Investors also can apply this investing style to small or mid cap stocks, which as the name implies is a process that selects the most promising small and mid-size companies for investment.
Most successful investors abide by some investing style. The alternative might be to chase some of the trendy or hot stocks for the season, a pursuit that can prove futile and not result in long term success. Also, every investor has a different tolerance for risk, so investors can pursue a path of investing that is tailored to their specific needs. For instance, an investor who cannot stomach some of the wild swings that are more common in certain industry groups can avoid potential volatility with the appropriate investment style. Value investing, which is a strategy that hunts undervalued stocks, is designed to cut back on volatility.
