Investment Strategy
Essay by review • April 15, 2011 • Essay • 306 Words (2 Pages) • 1,224 Views
In theory investors benefit from holding portfolios of investments rather than single investment vehicles. Without sacrificing returns, investors who hold portfolios can reduce risk, often to a level below that of any of the investment held in isolation. Individuals are not required to own diversified portfolios and are typically not prohibited from short sales or margin trading as are some institutions. Therefore most beginning investors favor smaller investments with less risk, therefore risk-adverse. Whereas senior investors may take on higher levels of risk and diversify much more. There is much risk involved with the stock market and investment decision shouldn't be taken lightly.
Most investors favor an active approach to common stock selection and management, despite the accumulating evidence from efficient market studies and the published performance results of institutional investors. The reason for this is obvious - the potential rewards are very large, and many investors feel confident that they can achieve such awards even if other investors cannot.
The most traditional and popular form of active stock strategies is the selection of individual stocks identified as offering superior return-risk characteristics. Such stocks typically are selected using fundamental security analysis, but technical analysis is also used, and sometimes a combination of the two. Many investors have always believed, and continue to believe that they possess the requisite skill, patience, and ability to identify undervalued stocks.
Most investment techniques involve an active approach to investing. In the area of common stocks the use of valuation models to value and select stocks indicates that investors are analyzing and valuing stocks in an attempt to improve their performance relative to some benchmark such as a market index. They assume or expect the benefits to be greater than the costs of time and money.
References
Gitman, L.J., & Joehnk, M.D., (2003) Fundamentals of Investing (9th ed.) Boston: Pearson Addison Wesley.
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