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What Is Quality Investing?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 October 2014
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Quality investing is a type of trading strategy that focuses on acquiring investments which exhibit standards considered to be a little above the norm. Often, identifying investment opportunities that fall into this category involves relying on ratings and assessments prepared by industry experts, as well as recommendations by brokers. Typically, quality investing will require considering not only the current price, but the overall attractiveness and quality of the investment, and its prospects for increasing in price and maintaining its reputation for quality over the long term.

One of the more common examples of quality investing can be found in the world of real estate. Here, the idea is to assess the current level of desirability of a given property based on its geographical location and the amenities offered by the buildings on the property. In assessing the prospects for the property, investors will consider the potential for the area to continue being desirable in the future, a factor that also serves to indicate the chances of the property appreciating in value over the years. If the property is located in a sought-after section of town and that part of town is expected to remain desirable for a number of years, then the holding may be considered a quality investment.

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Bond issues are another example of a setting in which quality investing takes place. Often, bonds are placed into two distinct classes or categories. The investment grade indicates a bond issued by a reputable and stable company, and they are considered high quality. By contrast, speculative grade or junk bonds are a little more suspect and while they may be inexpensive, they are considered greater risks than the investment grade bonds. In this scenario, an investor focused on applying the concept of quality investing would likely forego the purchase of the junk bonds and acquire investment grade bonds as a more suitable and secure investment opportunity.

Quality investing requires that the investor assess the characteristics of the investment opportunity in detail and determine if it meets a few basic qualifications. The issuer of the security must be financially stable and likely to remain so over the long term. The market price of the investment must demonstrate the potential to increase in value over the years, with relatively little in the way of temporary setbacks. In addition, the business model of the issuer should be evaluated closely, especially in terms of how much risk this model allows the company to take and what assets it has to cover any risky business deals it may attempt in the years to come. Fortunately, obtaining information of this type is relatively easy in many nations, thanks to disclosure regulations that businesses must comply with in order to issue securities that are available to the general public.

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