Which is your style: Growth or Value Investing
Growth Investing or Value Investing? Investors often get puzzled by this question. Weighing the merits of these two competing investment styles is like choosing between Chocolate and Cake. You want both.
While both, growth stocks and value stocks have the potential to maximize your investment value, they both follow different investment approaches. Let us find out the difference between growth investing and value investing.
What is Growth Investing?
Growth investing involves investing in companies that have an ‘above average’ growth rate. These companies grow significantly faster in terms of stock prices, revenue, profits or cash flows than other companies in the market.
Growth stocks tend to have relatively high valuations as measured by price to earnings ratio or price to book value ratio.
They are more expensive than their peers because of their higher price to earnings ratio.
What is Value Investing?
Value investing involves investing in companies that are undervalued and progressing slowly but have strong underlying value.
The idea behind investing in such companies is that the market will soon recognize their value and the share prices will rise thus generating substantial returns for investors. Value investing is done based on the future growth potential of the company.
Price to earnings ratio of value stocks is generally lower than their peers but they have a strong track record.
Difference Between Growth Investing and Value Investing
Growth stocks are considered riskier because of higher valuations and continuous price fluctuations due to market volatility. Any kind of unfavourable market condition or negative sentiment can decline the value of growth stock.
On the contrary, value stocks are considered less risky as they are characterised by a gradual move and hence there is no sudden decline or improvement in the value of value stocks. Even during poor market conditions, value stocks assure a better dividend pay record.
- Cost of Purchase
The price of growth stocks is high relative to their sales or profits. Growth stocks are more expensive owing to their future growth potential, hence investors can expect high price-to-sales and price-to-earnings ratios.
On the other hand, value stocks are less expensive as their stock prices are currently low relative to their sales or profits.
Growth stocks continuously yield higher profits. They are more likely to beat their peers and outperform even in the future.
Whereas, value stocks currently underperform and are priced lower than their real worth. They tend to yield profits, but in the long term.
In terms of profit, growth stocks win the short-term battle, whereas value stocks win the long-term war.
- Suitable For
Growth stocks carry higher inherent risks. There is no guarantee that your investment in a growth company will successfully lead to profit. Furthermore, growth stocks experience high volatility and price swings hence they are ideal for risk-tolerant investors with a longer time horizon.
On the other hand, value stocks are promising prospects that are likely to offer better returns once the prices rebound. They are comparatively stable during poor market conditions. Moreover, they have limited upside potential and therefore can be considered safer investment.
Growth Investing vs. Value Investing at a glance
When it comes to choosing the right stock trading strategy, investing can get tricky. Sometimes, the choices boil down to growth vs. value stocks.
Growth stocks and value stocks both have the ability to increase the value of your investment, but they take distinct methods to investing. Let’s examine the differences between value and growth investment.
Let us see both into detail.
What is Growth Investing?
Growth investing includes investing in firms with “above average” growth rates. These businesses outperform other market players in terms of stock price, sales, profitability, and cash flow growth.
When valuing firms using the price to earnings ratio or price to book value ratio, growth stocks typically have very high values. Due to their greater price to earnings ratio compared to their competitors, they are more expensive.
What is Value Investing?
Value investing includes Investing in undervalued, stagnant firms with high underlying values.
The rationale for investing in these businesses is that once the market realises their potential, share prices will climb, providing investors with significant profits. Value investments are made based on a company’s potential for future growth.
Value companies often have a lower price to earnings ratio than their counterparts, but they have a proven track record.
Difference between Growth Investing and Value Investing at a glance
|Factor||Growth Investing||Value Investing|
|Risk||Comparatively riskier because of higher valuations and continuous price fluctuations, prone to decline in value||Less riskier is no sudden decline or improvement|
|Cost of purchase||Expensive due to future growth potential||Less expensive due to undervaluation|
|Profits||continuously yield higher profits and might outperform in the future||Currently underperforming but profitable in the long term|
|Suitability||Ideal for investors willing to take high risk||Ideal for investors who are risk averse|
Now you would ask which approach is preferable? The solution is not so simple. When it comes to applying an investment strategy, there no clear cut “right” or “wrong”. A person’s risk profile and investing objectives have a major role in the decision they make about any particular investment technique.