Growth vs. Value Stocks – Which Suits YOU?
When it comes to investing in stocks, you can take one of two main approaches: growth or value. Explore the two concepts in more detail to see which you should choose, or whether you should use a combination of them.
A Quick Explanation
Growth investors look for stocks that have a great deal of potential for growth in earnings. Meanwhile, value investors look for stocks that are undervalued.
A Closer Look at Growth Stocks
Growth stocks are usually stocks of companies that have had better-than-average increases in their earnings recently. Experts predict their profit growth to continue. Importantly, there is never any guarantee for growth.
They Are Priced Higher
Growth stocks tend to have higher prices than the rest of the market. Investors expect the companies to grow and the stocks to increase in price, so they are willing to pay more for them initially.
They Have High Earnings Growth Records
These growth stocks will have high earnings growth, even when the economic conditions are less-than-stellar.
They Are More Volatile
An important caveat is that growth stocks tend to be more volatile. If, for example, there is negative news about the company, it can fall.
A Closer Look at Value Stocks
Value stocks are companies that have good fundamentals but aren’t currently in favor. Value investors also sometimes look for newer companies that haven’t attracted investors yet.
They Are Priced Lower
The goal with value stocks is to buy a company that is undervalued. The price is currently low, and you expect it to eventually recover when investors recognize its value.
They Are Priced Under Others in the Industry
The lower prices of value stocks aren’t just in the market as a whole. It also extends to the industry. Value investors look for stocks that they feel are low due to overreactions to recent issues.
They Are Slightly Less Risky
Compared to the market as a whole, value stocks tend to be a little less risky. But they are better for longer investments and can fluctuate more in the short term.
When to Choose Each
The typical advice is to use a combination of growth and value stocks. Growth stocks have historically performed best when company earnings rise and interest rates fall. But a cooling economy can lead to rapid drops in their value.
Meanwhile, look to value stocks early on during economic recovery. If you have a sustained bull market, however, avoid them.
Overall, combining the two types of investments will maximize your potential returns while minimizing your potential risks.
Growth stocks are stocks that are expected to have earnings growth, while value stocks are those that are believed to be undervalued. Some investors choose to stick to one or the other. But smart investors combine the two.