Ok, I get it. Who wants to study in their free time? Don’t worry.
Growth versus value stocks can be fun, interesting, and empowering to learn.
Remember we have to build financial literacy if we’re going to change the world. By the end of this post you are going to be able to highlight the main differences between growth versus value stocks and determine which approach is best for your investing style.
Go ahead, grab the cup of coffee and have a seat in a comfortable chair. We about to dig into the game right now.
Do not confuse value stocks with value investors
First, when comparing growth versus value stocks, do not confuse value stocks with value investors. Value investors buy stocks (value or growth stocks) that are trading at a discount to their intrinsic value because of a bad year or some event like COVID-19 interfering in the market.
Value investors do not necessarily only buy value stocks. They buy stocks with a margin of safety that minimizes their risk and increases their return on investment.
Now just because something is called a value stock doesn’t mean you should buy it today.
And just because the stock has a “cheap” price doesn’t mean you should buy it either.
You have to do the homework, the fundamental analysis, to determine if the stock is trading at a good value to buy today.
Typically value stocks have a low PE (price to earnings) ratio, low PEG (Price/earnings to growth) ratio, and high P/B (price to book) ratio. Go ahead and google these terms if you need help learning to break down the fundamentals of stocks and learn more about enter/exit strategies.
Growth versus value stocks (what is the difference?)
Now onto the great debate …growth versus value stocks…is one better, is there a difference, who care?!?
Well all investors should care because there is a difference. When investing in stocks instead of exchange traded funds (ETFs), investors need to understand the company.
It’s a must to determine the best entry or exit points as well as stay true to their investing strategy.
Some investors have built their portfolios with only growth stocks and been successful, while others have focused on finding big time success with value stocks.
- Growth Stocks
- Value Stocks
- Johnson and Johnson
- Chase Bank
- Exxon Mobile
- Proctor and Gamble
A value stock is basically a stable equity (company) with relatively little risk. These companies have been around for a long time and typically have very good fundamentals. They manage their balance sheets very well and tend to have cash on hand. This cash is often returned to shareholders in the form of dividends.
Value stocks = dividends (for the most part).
These companies may not see their revenue increasing year after year. But revenue is steady.
Value stocks are typically low risk investments because of their proven track record. If you do your homework, you can determine a relatively profitable time to buy and sell these stocks.
Growth stocks are definitely more risky and more expensive than value stocks.
Sometimes their record is unknown as in the case of Tesla. On the other hand, their record is known to be amazing such as Amazon.
But because of amazing potential, growth stocks are sometimes growing so fast that it is hard to determine a good entry/exit price point and you are left with smaller profits.
Sometimes you find yourself holding a stock that was growing good but then something catastrophic happened and the company went bankrupt.
Hence, increased risks with growth companies.
You have to do a solid fundamental analysis before buying any stock.
Growth stocks do not necessarily return profits to shareholders through stock buy-back programs or dividends. They typically reinvest in the company for growth.
Value stocks may return profits to shareholders through dividends instead of reinvesting.
Bottom line, growth stocks and value stocks are just stocks with different goals.
The market doesn’t really recognize something as a growth stock or a value stock. That’s sort of your call based on your analysis. What are you looking for in a stock?
Just remember, things that go up quick, can also fall quick.
With big gains in stock price, you can see big losses. Growth stocks are meant to be long-term investments because of these swings in prices.
Apple is an amazing growth company. They are consistently increasing revenue over time and always being innovative in creating new products. Most of the money that the company makes is reinvested into the company for further growth. However, they do offer a small dividend and their price to earnings ratio is relatively low compared to Amazon or Tesla.
Your risk and cost per share (investment) is high but the return can be amazing. You have seen apple stock price rise more than 20% each of the past 5 years. That’s better than the market average (S&P 500 that increased about 10% yearly over the past 5 years).
Now back to our original question.
Do you know the difference between a growth or value stock?
Do you prefer one over the other?
I think after writing this post I am pretty confident I know the difference, but I’m not sure it matters so much to me. would do a fundamental analysis of any company that I thinking about investing in rather than simply say I’m investing in a stock because it is a growth or value stock. I honestly like both and my portfolio has both types of stocks in it.
For me, I have to believe in the company that I am buying.
I do not buy a stock based on one thing in my analysis. I do alot of homework before I hit trade.
But knowing whether a company is a growth or value stock is important to me and it helps me determine my exit strategy and my long-term goals by owning the stock. More to come on this in the future. Thanks for reading.
- Value stocks trade at a lower price to earning ratio and generally offer cash back to shareholders in the form of dividends.
- Growth stocks trade at a higher price to earning ratio because investors perceive the company has strong growth potential and they want to reinvest money back into the business driving the prices higher.
- There is no wrong investing strategy. Determining if growth versus value stocks matter, is a matter of personal opinion and personal investing style.
- Investors must do their homework to determine the level of risk involved in any investment.
Growth versus value stocks–Do you know the difference? What types of stocks do you prefer? Comment below!