FACTOR INVESTING

 The concept of factor investing is an investment strategy used to select assets based on specific set off attributes and factors. In simple words this strategy can also be refereed to as a combination of active and passive investment strategies. Investor who want to follow factor investing strategy identify the characteristics they look for in securities.

There are two main types of factors that have historically been associated with an assets return - macroeconomic and style factors.Style factors are factors that explain risks and returns within each asset class whereas macroeconomic factors are factors that explain risk across multiple asset classes. some common macroeconomic factors include the rate of inflation, GDP growth, political risk, sovereign risk and the unemployment rate. Common style factors encompass growth versus value stocks, size, volatility,momentum,quality and dividend yield. These attributes are readily available for most securities and are listed on popular stock research websites.

The most commonly used factors are value, quality,momentum,low volatility and size. these premiums exist due to either strong economic rational or behavioural anomalies. the value factor is an example of the former and involves buying stocks for cheaper than their intrinsic value and making a return when these stocks appreciate. Momentum factor premiums are behavioural in nature and signify the persistence of stocks with strong price momentum in upward and downward trend.   

COMMON STYLE FACTOR 

SIZE

Investor can capture size by looking at the market capitalization of a company. Market capitalization is used to determine whether it can be classified as a small cap, mid cap or large cap company. This strategy focuses on small cap companies because, historically the growth or earning potential is higher as compared to large cap companies.

QUALITY

The quality factor of a company can be captured using diverse fundamental ratio calculated using financial statements such as return on equity, return on assets, gross margin, EPS growth and debt to equity. in essence investor want to invest in a company that is financially healthy. high quality companies can be defined by characteristics such as strong corporate governance, high ROE, low debt, high liqudity, stable earnings, consistent asset growth and health free cash flows.

VALUE

The value factor aims to capture excess return from undervalued stock that are currently trading at low prices relative to their fundamental value. value stocks are usually large-cap and well established companies that are currently trading below their real worth and will thus provide superior returns.

MOMENTUM

Momentum investing is type of factor investment strategy which aims to purchase financial assets such as stocks,bond,commodities or derivatives that have been exhibiting an upward price trend or short sell securities that display a downward price trend.

VOLATILITY

volatility as a factor is usually measured using common statistical tools like standard deviation , beta or semi variance. the low volatility factors targets securities with lower volatility characteristics.this translate into generally more consistent return with low deviation from long term means.