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  • What is factor investing? – TIPS & TRICKS
  • What is factor investing? – TIPS & TRICKS

What is factor investing? – TIPS & TRICKS

Factor investing explained simply

A classic stock portfolio is often composed on the basis of market capitalization. This means that you give the heaviest weight to stocks with the largest market value. Factor investing is different. Composition is based on – what’s in a name – factors. Factors that can play a role are, for example, size, dividend or volatility .

The idea behind it is that certain pillars (factors) determine the return and risk of a share. When composing your portfolio, you take these factors into account in order to select the best shares and consequently strive for the ideal balance between return and risk.

Never heard of factor investing? You might be right, because it is relatively new to the market. The rise of this concept goes hand in hand with the emergence of ETFs with an active edge, such as smart beta or strategic beta. Although these are passive products, the intention is to achieve a better return than classic indices or to reduce risk by relying on factors.

What factors exist?

Factor investing can be done using various factors. Which factors, I hear you ask. The most important are the value factor, the minimum volatility factor and the quality factor.

Value factor

Here you take into account the valuation of shares. And then you choose  undervalued shares . These are usually companies with a low  price-earnings ratio .

A share that is undervalued compared to its real value is often cheap and has a lot of growth potential. For example, it could be a new company or a company that has just gone through a bad period. When recovery sets in, you as an investor can reap a high return. There is still a risk, because you can never be 100% certain that the share will actually increase in value.

Minimum volatility factor

With this factor, you choose stocks that are as low-volatility as possible. The higher the volatility of a stock, the greater the volatility. And it is precisely low volatility that ensures a lower risk of a large loss. The minimum volatility factor provides a better ratio between return and risk.

Quality factor

Whoever uses the quality factor as a benchmark, looks for qualitative companies. These are companies with a strong balance sheet and a solid and high profitability.

A company with a stable and high profit usually has a better return than its brother with a less stable and low profit. The risk of a company with solid profit is also lower.

The quality factor is gaining popularity, although it must be said that not everyone is a fan. The factor often has a different meaning and it is not always clear what this pillar entails.

Momentum factor

Finally, there is also the momentum factor. Here, the investor looks at the performance of the share in the past period. When a share has done well, it can be expected that this will continue in the future and that this share will continue to outperform the other shares.

The opposite is also true. A stock that did not do well in the past period will probably do less well in the coming period compared to other stocks.

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Day Trading Strategies for Beginners – TIPS & TRICKS

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Following and spotting opportunities and possibilities is easier with just a few stocks . It has become increasingly common to trade in “fractional shares”, which are, as the name suggests, smaller parts of a single share. This allows you to specify that you want to use a specific, smaller amount to invest. This means that, for example, Apple shares are trading at $250 and you only want to buy $50 worth of Apple shares, many brokers now allow you to buy one-fifth of a share. Avoid Penny Stocks  You’re probably looking for deals and low prices. However, stay away from penny stocks . These are often illiquid stocks with very little chance of making a big profit. Stocks that are listed for less than $5 per share are delisted from major exchanges and are only available over-the-counter. Unless you see a real opportunity and have done your research, stay away from these securities. Time your transactions Many orders placed by investors and traders are executed immediately when the markets open in the morning, which contributes to price volatility. An experienced player can recognize these patterns and profit from them. For novice day traders, it may be wiser to observe the markets without trading for the first 15 to 20 minutes. Volatility usually levels off halfway through the trading day, and then starts to increase again as the end of the day approaches. Although peak hours on the markets offer many opportunities, it is safer for beginners to avoid them. Limit losses with limit orders Choose what type of orders you place for your trades. Will you use market orders or limit orders? When you place a market order, it will be executed at the best available price at that time — so there is no price guarantee. A limit order, on the other hand, guarantees the price, but not the execution. 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Because CFD brokers usually work with leverage, small price changes can cause large changes in the value of your portfolio. Pay close attention, CFDs usually involve greater risks. Therefore, read up on it and try out a demo account first if you have any doubts. Our reading tips for the novice investor

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Forex Investment Strategies – TIPS & TRICKS

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Expensive VS Cheap Stocks – THIS IS WHAT YOU NEED TO KNOW!

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