When it comes to choosing the right stock trading strategy, investing can get tricky. Sometimes, the choices boil down to growth vs. value stocks.
These are more of the investing styles than the categories of the stock.
However, what do growth and value investing exhibit, and which is better? Let’s find out here!
Growth Investing vs Value Investing
Growth Investing
Growth investing involves investing in stocks that have provided above-average returns and exhibit the potential to outperform the market over time.
These stocks have a solid upside potential owing to multiple factors involving product lines, certain competitive advantages etc.
These stocks can be found across all sectors, whether small-, mid- or large-cap. Growth firms have a bigger potential for profit, but they are also riskier.
There’s no assurance that a company’s growth investments will result in profit. Growth companies have larger stock price movements.
Therefore they may be better suited to risk-averse investors with a longer time horizon.
Value Investing
Value investing involves investing in the stocks of companies that are currently traded below their actual worth.
These are presenty undervalued, which makes them investment-ready as they have the potential to offer good returns when traded in their actual values in the future.
There are a number of reasons for the undervaluation of such stocks.
This might include the investor’s perception of the company or the stock, the company’s key person being associated with scams or unethical activities, or even manipulation by certain operators.
Whatever the reason may be, undervalued stocks offer a solid opportunity to buy and hold the particular stock till it starts trading at its true value.
Growth Investing vs Value Investing – Which One is Better?
Before we proceed with which one is better, we should look at some of the features of both these stocks:
Parameters | Growth Stocks | Value stocks |
Risk | Comparatively riskier | Comparatively less risky |
Dividends | Dividend payouts are less likely as the profits are reinvested to channel the company’s growth.. | HIgh dividend payouts are probable |
Price | Correctly valued or overvalued depending on the stock | Currently undervalued |
PE Ratio | Above-average PE ratios | Low PE ratios |
While the above comparison brings out a clear picture, the investing style depends upon the investor’s goals and preferences. The following points will help you decide your investing style:
Passive Income:
If you want a passive income from your stock portfolio, go for value stocks as dividend payouts are more probable.
However, if you want your portfolio to grow, growth stocks are ideally suitable.
Price Movements:
Prices of growth stocks are more volatile than value stocks. Therefore, investors who don’t want volatility in investments should go with value stocks as against growth stocks.
Confidence in Stock Selection:
Finding growth stocks is easier than finding value stocks. You might select a stock because of its low price, which eventually becomes a value trap.
You need to determine the company’s actual value and then make a decision.
This is not so with the growth stocks, as they can be selected based on emerging trends and industries.
In A Nutshell
Whether you go with growth investing or value investing depends entirely on your investing goals.
However, it is essential to invest after thorough research about the company to avoid losses.