Growth vs Value Investing

4 min read

When it comes to making investments, investors can choose between various options – Active vs. Passive, Debt vs. Equity, Mutual Funds vs. Stocks, and Growth Investing vs. Value Investing. 

Growth and Value investment styles are among the most commonly used investment strategies, but the two are quite different from each other. In our previous blog we discussed both the investing styles very briefly and in today’s  post we will dive deep into these to understand how and why they are different from each other.

In this blog, we will take a closer look at these two distinctive strategies based on the differences in their objectives, valuation metrics, and performance. Knowing these differences can help investors identify which strategy is better suited to their investment goals.

What is Value Investing?

In this type of investment style investors try to find value in companies whose market/price performance does not reflect the true worth of a company vis-a-vis it’s business performance or potential,  hence can be underestimated by many investors. The thought behind investing in such companies is dependent on its future growth potential. These companies are analyzed by the experts who evaluate their future growth pace.

The experts compare the company’s intrinsic value with its current market value. The intrinsic value of any organization is determined by evaluating different aspects. These aspects include the business model, management, financial statements, and competitor analysis.

When the intrinsic value as compared to the current value is higher, then its stocks are of value. Usually, there are lower price fluctuations in value stocks relative to the market. So to sum up, value investing is identifying potential in companies which are currently down but can take a pace in the future and eventually give huge profits.

 What is Growth Investing?

Contrary to value investing, growth investing is a style that emphasizes companies which are projecting higher growth rates. These companies tend to perform and showcase growth irrespective of the market conditions. They perform even when other companies are impacted by market conditions.

They have better USPs and continue to outperform their competitors. Investors are attracted by such companies due to its future growth potential. The stock prices of such companies are also higher and are considered expensive.

 However, investors still invest in these expensive stocks as they are rewarded with high profits in the future. The companies with growth stocks usually offer innovative services and are in a better place financially as compared to other competitors. Investors scrutinize these companies and they tend to have strong growth potential

Now that we have understood both the styles individually let us learn the difference between them.

Value Investing vs Growth Investing

Value investing is like a ‘sleeping giant’. Investors who prefer this approach are willing to wait until the ‘giant awakens’. However, at times the wait can be longer than expected. They tend to be comparatively stable in terms of the market movement and have a good track record of paying dividends. That’s why investors prefer them as a hedge during poor market conditions.

On the other hand, in growth investing, stocks are at a premium price, and investors are willing to pay the same because of their consistent year on year high growth rate. However, because they tend to sway along with market sentiments, negative news can have an outsized impact on the share prices. Moreover, growth stocks often prefer to reinvest their profits for expansions instead of handing out dividends.

Now the million-dollar question! Value investing vs growth investing, which investment strategy is better? 

The answer, however, is not so straightforward. Both approaches have their own merits and demerits. There is no specific ‘right’ or ‘wrong’ while choosing an investment strategy when it comes to stock picking. 

Both growth stocks and value stocks offer lucrative investing opportunities to their shareholders. The best investment style for you depends largely on your personal financial goals and your investing preferences.

  1. Growth stocks are more likely to be appealing if the following apply to you:
  • You’re not interested in current income from your portfolio. Most growth companies avoid paying significant dividends to their shareholders. That’s because they prefer to use all available cash by reinvesting it directly into their business to generate faster growth.
  • You’re comfortable with big stock price moves. The price of a growth stock tends to be extremely sensitive to changes in future prospects for a company’s business. When things go better than expected, growth stocks can soar in price. When they disappoint, higher-priced growth stocks can fall back to Earth just as quickly.
  • You’re confident you can pick out winners in emerging industries. You’ll often find growth stocks in fast-moving areas of the economy such as technology. It’s common for many different growth companies to compete against each other. You’ll need to pick as many of the eventual winners in an industry as you can, while avoiding losers.
  • You have plenty of time before you’ll need your money back. Growth stocks can take a long time to realize their full potential, and they often suffer setbacks along the way. It’s critical that you have a long enough time horizon to give the company a chance to grow.
  1. Value stocks may look more attractive if you seek out these characteristics:
  • You want current income from your portfolio. Many value stocks pay out substantial amounts of cash as dividends to their shareholders. Because such businesses lack significant growth opportunities, they have to make their stock attractive in other ways. Paying out attractive dividend yields is one way to get investors to look at a stock.
  • You prefer more stable stock prices. Value stocks don’t tend to see very large movements in either direction. As long as their business conditions remain within predictable ranges, stock price volatility is usually low.
  • You’re confident you can avoid value traps. In many cases, stocks that look cheap are value traps, or cheap for a good reason. It could be that a company has lost its competitive edge, or it can’t keep up with the pace of innovation. You’ll have to be able to look past attractive valuations to see when a company’s future business prospects are poor.
  • You want a more immediate payoff from your investment. Value stocks don’t turn things around overnight. However, if a company is successful in getting its business moving in the right direction, its stock price can rise quickly. The best value investors identify and buy shares of those stocks before other investors catch on.
  • Finally, when it comes to overall long-term performance, there’s no clear-cut winner between growth and value stocks. When economic conditions are good, growth stocks on average modestly outperform value stocks. During more difficult economic times, value stocks tend to hold up better. Therefore, which group outperforms depends a lot on the specific time period you’re considering.

There are pros and cons to both value and growth investment. Understanding how both investment strategies can play a role in your portfolio can allow you to maximize the benefits of being an investor. Whether you’re searching for growth or value stocks, ShareIndia can be a great resource. ShareIndia helps you to find companies that have seen strong recent share price appreciation. Contact ShareIndia experts and understand what suits you and your investment portfolio the best!

Disclaimer: Any Advice or information in the post is a general advice for education purpose only and is not responsible for generating any trading strategy for anyone, please do not trade or invest based solely on this information.

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