Style analysis is the strategy of evaluating and identifying the investment style that an investor or money manager usually employs when making decisions about the acquisition or sale of various investment options. Conducting an analysis of this type from time to time can help determine if the currently employed strategy or style is actually aiding the investor in achieving his or her financial goals, or if there is a need to make some changes in how investments are handled.
There are many different kinds of investment styles, including combinations of one or more basic styles. Some are designed for quick return, while others are suited to achieving long-term goals. Classifying some of these basic styles makes the process of style analysis much easier, since each of these styles possess characteristics that set them apart from the rest.
One of the most basic styles is known as growth investing. This strategy involves focusing on options that the investor believes will increase in value over time, regardless of the current price of the shares. When an investor favors this approach, the style analysis is likely to identify him or her as being conservative in the selection of securities. The investor will likely work toward acquiring options that are likely to provide a steady return over a longer period of time, while carrying a relatively low degree of volatility.
In contrast, value investing is a style that focuses on finding stocks where the company is currently undervalued, and buying those shares while the purchase price is relatively low. The investor will hold the shares as various factors cause the value of the shares to increase, then sell them just before they begin to drop again. A style analysis that reveals this as the primary investment style indicates an investor who is willing to assume more risk in order to earn a return in a relatively short period of time.
Day, or active, trading is an investment style that calls for the rapid buying and selling of securities, often during the same trading day. An investor using this approach may purchase an investment just as the market opens, and watch its upward movement throughout the day. As the investment begins to level off, it is sold and the proceeds used to purchase another security that is projected to begin increasing in value. Should the style analysis show this is the predominant investing style, the investor is likely to be someone who likes to take chances, and is looking for a quick return on his or her investment.
Large cap and small cap investing are two other basic investment styles. Large cap refers to companies with a market capitalization of over $10 billion in US dollars (USD), while small cap refers to companies with a market capitalization of that is significantly lower, often less than $2 billion USD. Market capitalization is simply the total outstanding shares of a company multiplied by the current price per share. When an investor chooses to use one of these approaches, the style analysis will often reveal an investor who has an eye for detail, and who looks closely at the history, current status, and projected future movement of the stock before making a purchase or selling a shares that are currently part of the portfolio.
It is important to note that most investors tend to make use of more than one investing strategy. This is one reason why style analysis is so important. As the investor’s goals change over time, as well as his or her willingness to assume risk, current investing strategies may not adequately serve under the new circumstances. By using style analysis to identify the general approaches used by the investor, and compare those to the goals and aims of the investor, it is possible to determine if it is time to change strategies, or if current strategies are the best fit for the investor.