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Growth vs. Value Stock Investing: Understanding the Differences

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Growth vs. Value Stock Investing: Understanding the Differences

 

 

Growth vs. value: What’s the difference?

The main difference between growth and value stocks is that value stocks are known as  companies investors who are undervalued by the market, and growth stocks are companies that investors who will deliver better-than-average returns. 

There are many growth mutual funds and value mutual funds, which hold growth and value stocks respectively.

Before you choose for a different option for a stock or mutual fund of the growth or value variety, here’s what you need to know, starting with a comparison of the major differences:

 

Value investing defined

Value investors stick to hunting for hidden gems in the market: stocks which are low prices but promising prospects. The reasons these stocks may be undervalued vary widely, including short-term events like a public relations crisis or a longer-term phenomenon which have depressed conditions within the industry.

 

These investors buy stocks they believe are underpriced, either they are within a specific industry or the market, but betting the price will rebound once others catch on. Generally speaking, most of these stocks have low price-to-earnings ratios (a metric for valuing a company) and high dividend yields (here the ratio of a company pays in dividends relative to its share price). The risk? The price may not appreciate as expected.

Growth investing defined

 

Growth investors often like to chase the market’s high fliers. You may have likely seen the disclaimer from financial companies that past performance isn’t indicative of future results. Well, this investing style is so seemingly at odds with that idea in growth investment. It’s more essentially doubling down: Investors bet a stock which has already demonstrated better-than-average growth (be it earnings, revenue or some other metric) will continue to do so, making it attractive for investment. These companies are leaders in their respective industries; their stocks have above-average price-to-earnings ratios and may pay low (or no) dividends. But by buying stock at an already-very high price, the risk is that something unforeseen which could cause the stock’s price to fall.

 

How growth and value investing overlap

 

Each school you see, it has so many devoted followers, but there’s a lot of overlap between growth and value investment. Depending on different criteria used for selection, you’ll see there are stocks that are included in both value and growth investment. 

 

In part, it’s so much to do about a certain distinction that’s not easily changeable. For example, a stock which evolves over its full lifetime from value to growth, or vice versa.

It’s also worth noting that investors in the value versus growth debate have the same goal which is 0buy low and sell high, they’re just doing it in different ways.

 

Value investors always value companies that have already earned their stripes and have a need for a stock price that’s lower than it should be and expect it may rise again to reflect their profit. Growth investors look for companies with future potential so that they can expect the stock price to increase even if it’s already relatively high as the companies reach or exceed that potential. Same desired destination has different ways of getting there.

 

Investing in growth and value stocks

The stock market goes through cycles of varying length that favour either growth or value strategies.

 

What’s an investor to do? One option remains to invest in both strategies equally. Together, they add diversity to the equity side of a portfolio, offering potential for returns whenever either style (growth or value investment) is in favour.

 

Because the market is volatile, and when it goes in value-growth cycles, think about your investing strategy and consider rebalancing periodically so that your portfolio stays in your preferred allocation.

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