When deciding to invest in the share market, it is important to understand the type of investor you are and what you are looking to achieve from your investment. While everyone would love to own a company that quadruples in price overnight, each investor needs to understand their tolerance for risk and how they will react if the path to fortune is far from smooth sailing.
Most investors will fall into three broad categories.
Category 1: Safety First
This investor is looking for a company whose share price remains fairly stable, growing slowly over time while paying a reliable dividend. In general this type of investor does not like to see their investment fluctuate greatly in price as it would cause emotional distress and possibly affect their sleep.
Investors who fall into this category should look at mature companies that hold long-term contracts resulting in reliable cash flow. One such company to consider would be APA Group (ASX: APA).
If you haven't heard of the APA Group, it operates a natural gas transportation business with interests in energy infrastructure across Australia, including natural gas pipelines, gas storage facilities and a wind farm. APA Group shares offer safety first investors lower volatility, with a beta volatility ratio of 0.76 which in layman's terms means it is less volatile than the overall market. APA also offers a growing dividend yield supported by growing demand for natural gas.
Source: APA Group company presentation
Category 2: Growth Driven
This type of investor understands that fast-growing companies can, and often do fluctuate wildly in price. They are prepared to accept volatility in the price as the cost for possible higher returns. They are also prepared to lose all or part of their initial investment if the investment doesn't work out as planned.
Investors who fall into this category should look at shares such as MNF Group Ltd (ASX: MNF).
MNF Group Limited is a provider of internet-based (IP) telecommunication services which include VoIP (Voice over Internet Protocol) data and video services to residential and business enterprises.
Through a combination of both organic growth and acquisitions, MNF group has grown EBITA over 1,200% in the last four years and is predicting a further 40% rise for FY2016.
Source: MNF Group Presentation
While MNF Group has done well over the last five years and operates in a fast-growing telecommunications sector, investors should also be mindful that the sector is highly competitive and vulnerable to disruption by new entrants.
Category 3: Growth and Income
This type of investor wants the best of both worlds. They are prepared for some volatility in price and they are looking for a business which has a proven track record of paying investors dividends along with growing the company.
Investors who fall into this category should look at companies such as Retail Food Group Limited (ASX: RFG).
Retail Food Group is a retail food brand manager and franchisor with operations in Australia and China. Retail Food Group is probably best known for the Gloria Jean's brand and as a major supplier and roaster of coffee beans in Australia.
Source: Retail Food Group Company Presentation
Over the past five years, Retail Food Group has continued to grow organically and via acquisitions. It is forecasting NPAT growth of 20% for FY2016.
Foolish takeaway
Investors who take the time to understand their risk tolerance before making investment decisions can avoid costly mistakes. All successful investors have learnt to base their decisions on facts rather than emotions and they adapt portfolios to complement their personality.
