Factor investing

Imagine you have a big box of candy. Instead of eating all the candy at once, you decide to sort the candy into different types like chocolate, gummies, and lollipops. This way, you can choose which type of candy to eat depending on your mood.

Similarly, in investing there are different types of stocks, or candies in our example, that can be sorted by certain characteristics called factors. Factors can be things like size (how big the company is), value (how cheap or expensive the company is compared to other similar companies), or momentum (how quickly the company's stock price is moving).

Just like how you sorted your candy by type, investors can sort stocks by factors to create a diversified portfolio. This means they can choose which factors they want to invest in depending on their investing goals.

For example, if an investor wants to invest in small companies, they can choose to invest in a factor called small-cap. If they want to invest in companies that are undervalued by the market, they can choose to invest in a factor called value.

Factor investing allows investors to have more control over their investments and potentially earn higher returns by choosing factors that align with their investing goals.