Five common investing styles explained

Have you heard of income, value, growth, contrarian and quality investing but not known exactly what they mean? Then wonder no more. This quick guide will give you a better understanding of these much-used investing styles, or strategies.

The reality is that you may be using one, two or even more of these styles to make your investment choices without knowing it. Equally, if you’re not actively using any of these strategies - and on reading this are interested - just be sure that any decisions you make keep your broader financial goals, circumstances, timeline and attitude to risk in mind. To give you a practical example of these investing styles, I’ve highlighted one Select 50 global fund for each category.

Growth investing - chasing potential

Do you naturally look at something and see its potential? Growth investing aims to increase your capital over time by focussing on companies, markets and assets which are expected to increase in value at an above-average rate. As such, growth investing comes with a high level of risk as these investments don’t tend to come with much of a track record on which to base your decisions. But that’s a risk growth investors are happy to take - as high risk comes with potentially higher returns (of course, the reverse is true also).

Growth investing idea: Rathbone Global Opportunities Fund.

Value investing - bargain hunters

Love a bargain? Welcome to value investing. Value investors look for stocks or funds which appear to be trading at less than their true value. While there is no single objective measure of 'true value', one pointer to an undervalued company can be when its market value is less than its 'book value' - its assets minus its liabilities. Value investors believe certain stocks are undervalued because markets can overreact. And when this happens certain stock price movements don’t reflect a company’s long-term potential. That’s where value investing comes into its own and investors try to seize what they see as an opportunity for greater returns. Again, at the higher end of the risk / reward spectrum.

Value investing idea: Dodge & Cox Worldwide Funds - Global Stock Fund.

Contrarian investing - going against the grain

Are you someone who likes to buck the trend? Then contrarian investing might be right up your street, as contrarian investing opposes investor sentiment at any given time. It can be applied to individual stocks, an industry and even an entire market. It’s the antithesis of herd mentality (which can make markets both over and under-priced). In some respects, it’s similar to value investing as both look for stocks which are undervalued - which is why it’s also considered a risky strategy. Warren Buffett is a renowned contrarian investor.

Contrarian investing idea: Schroder Global Recovery Fund.

Quality - getting behind a good thing

Quality investing looks to invest in financially healthy companies, with strong earnings and healthy balance sheets. These kinds of companies tend to invest in themselves as a result - ploughing their profits back into their business to help them grow even stronger. Investing in equities - whether that’s through shares or funds - is riskier than other asset classes. Quality investing can help mitigate some of that risk as the targeted companies tend to come with a good track record. Of course, past performance is not a reliable indicator of future returns.

Quality investing idea: BNY Mellon Long Term Global Equity Fund.

Income investing - slow and steady

Are you looking for a reliable return on your investments? That’s what income investing aims to do. Income investing is at the lower end of the risk spectrum. Typical investments include income-oriented stocks or funds, bonds, cash funds, savings accounts and real estate investment trusts. It’s a style that’s commonly adopted by people who have grown their wealth - often, but not always, as they approach or are in retirement - and want to turn that into a steady income.

Income investing idea: Fidelity Global Dividend Fund.

And there’s more…

The above capture the broader, more mainstream investing styles. There are, of course, others. Momentum investing is a little like quality investing, but homes in on the idea that if you buy what’s already gone up in price, it will continue to do so. It’s one of the more controversial investing styles as it opposes any notion that investors react to prices rationally (when a share price increases, FOMO can attract more buyers; when it falls, investors question that the market knows something they don’t and sell).

There’s also small and large cap investing. In the UK, small cap investing tends to refer to companies with a market capitalisation from £50 million to £250 million, while large cap investing refers to companies listed on the FTSE 100 (at time of writing the company with the smallest market capitalisation at £2.3 billion was St. James’s Place, while the largest was AstraZeneca at £185.8 billion). Small cap investing is considered riskier than large cap investing.

Some people refer to active investing and passive investing as investing styles. While this isn’t wholly incorrect, as it speaks more to how a fund is managed, I’ve not included these.

Looking for investing inspiration?

Growth and income investing tend to be the types that our customers are more interested in. You can find related articles in the links below. Please read these at your leisure.

Investing for capital growth

Investing for income

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Overseas investments will be affected by movements in currency exchange rates.  Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the pursposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.