Active vs. Passive:
Active investors believe in their ability to outperform the overall market by picking stocks they believe may perform well.
Passive investors, on the other hand, feel that simply investing in a
market index fund may produce potentially higher long-term results (pointing out that the majority of
mutual funds underperform
market indexes). Active investors feel that a less
efficient market (prices inhering all news, and hence potential) should favor active stock selection: for example, smaller companies are not followed as closely as larger blue-chip firms, and may then trade at a discount to true value. The
core-/satellite concept combines a passive style in an efficient market and an active style in less efficient markets.
Growth vs. Value: Active investors can be divided into
growth and value seekers. Proponents of growth seek companies they expect (on average) to increase earnings by 15% to 25%.[citation needed]Value investors look for bargains — cheap stocks that are often out of favor, such as cyclical stocks that are at the low end of their
business cycle. A value investor is primarily attracted by
asset-oriented stocks with low prices compared to underlying
book, replacement, or
liquidation values. These two styles may offer a
diversification effect: returns on growth stocks and value stocks are not highly correlated, thus by diversifying between growth and value, investors may reduce risk and still enjoy long-term return potential.
Small Cap vs. Large Cap: Some investors use the
size of a company as the basis for investing. Studies of stock returns going back to 1925 [citation needed] have suggested that "smaller is better," and on average, the highest returns have come from stocks with the lowest
market capitalization, the so-called "
Size premium". At the same time, small-cap stocks have higher
price volatility, which translates into higher risk.[4] (Also, there have been long periods when large-cap stocks have outperformed.) Some investors then choose the middle ground and invest in
mid-cap stocks seeking a tradeoff between volatility and return. [1]
