Stock market investors are broadly classified as growth and value investors. If you are a new investor, growth and value investing are two approaches to stock investment. Each has faithful groups of supporters who will support their views with theories, analysis, and worldviews. To become a successful investor, it is important to understand the differences between the two. So, here we are going to discuss growth investing vs value investing, and the merits and demerits of both.
What are growth stocks?
Growth investors select growth stocks. These stocks are from companies which are growing at a rate faster than the market, generating better-than-the-average gains. Investors target the emerging companies with higher potential for growth but don’t have an established history. Characteristics of growth stocks stand below.
Attributes of growth stocks
Higher price than the broader market
Investors are willing to pay for a higher price-to-earning in expectation of higher returns.
Higher growth record
These companies perform better than average when the market levels are rising.
Higher volatility than the broader market
The risk of buying growth stocks is that they are volatile. Its price can fall sharply on any negative news about the company or sector.
What are value stocks?
Value investors invest in companies that are currently trading below their fair price in the market but have strong fundamentals. These can include new companies that are not yet recognised by investors.
Attributes of value stocks
Undervalued than the broader market
Value investors invest in company stocks that are currently undervalued but will bounce back when investors will recognise the true value.
Priced lower than peers
These stocks have fallen out of favour due to investors overreacting to negative news about the company, such as lower profit, changes in management, or legal issues which put doubts on the long-term prospects of the organisation.
Carry less risk than broader market
These stocks will take more time to turn around and it also makes these stocks less volatile to market fluctuations. Hence, these stocks are suitable for long term investors.
Comparison between growth and value investing
The following comparison of growth investing vs value investing will help you identify growth and value stocks.
|Parameters||Growth investing||Value investing|
|Definition||It is an approach to invest in companies that investors anticipate will expand more rapidly than others. As a result, investors expect higher and quicker returns.||Value investors seek stocks that are currently undervalued, selling below their fair price in the market but these stocks are from companies with robust fundamentals.|
|Approach||Investors invest in new companies with potential to grow faster and pay higher prices for their stocks.||Value stocks are often shares of companies that are matured with track records.|
|Focus||Companies that are new with rapid growth potential.||Companies that are trading below market average.|
|Risk||Growth stocks have the trait of being more volatile. These stocks usually perform better in a growing economy. But their values can become negative when the economy is slow.||Value investing usually carries less risk than growth investment.|
|Expense||Growth stocks are more expensive compared to their profits. Hence growth investment is expensive.||In comparison to growth investing, value stocks have comparatively lower prices given the same fundamentals.|
|Investment horizon||Typically done over a long term investment horizon.||Value investing is usually done over a shooter investment horizon.|
|Dividends||The dividend payment of growth stocks is typically low.||Value stocks usually pay higher dividends.|
|Stock movement||Stock price movements are usually dramatic and frequent.||Value stocks are steadier and have less price volatility.|
|P/E ratio||Higher for growth stocks||Value stocks have a low P/E ratio.|
Growth vs value investing: Which is a better investment approach?
Every investor’s journey in the stock market is different. It depends on their risk appetite, financial objectives, time horizon and other factors. So, there is no universal right or wrong approach.
If you are a young investor with a long investment horizon and higher risk appetite, you may be attracted to growth stocks that have higher earning potentials. However, most investors will put together an investment portfolio that includes both growth and value stocks. They usually put together a portfolio that is flexible and generates a reasonable amount of earnings with significant growth visibility.
Investors often argue about value investing vs growth investing but over a long period no one investing strategy has outperformed the other. Moreover, investors must pick up stocks based on their understanding of the market. Therefore you should create a diversified portfolio combining both the styles, often called a blend style of investing for better risk-adjusted returns.