Hello Readers! This is 2nd blog on our knowledge series and today we are going to learn what are growth stocks & value stocks? Growth investors are drawn to businesses that are projected to rise faster than the rest (either through sales or cash flows and certainly through profits). In order to expand, businesses spend earnings on their own expansion, in the form of new employees, facilities, and acquisitions, as growth is the focus. On the other hand, Investing in value is about finding diamonds in the rough; companies whose stock prices do not necessarily reflect their basic value. Value investors are looking for companies that trade at a share price that is considered a bargain. The market will properly recognize the value of the company as time goes on, and the price will rise.
What is a Growth Stock?
A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends. This is because the issuers of growth stocks are usually companies that want to reinvest any earnings, they accrue in order to accelerate growth in the short term. When investors invest in growth stocks, they anticipate that they will earn money through capital gains when they eventually sell their shares in the future. Because of their future prospects, growth stocks are projected to outperform the overall market over time.
Growth stocks often look expensive, trading at a high P/E ratio, but such valuations could actually be cheap if the company continues to grow rapidly which will drive the share price up. Don't expect growth company dividends, it's going big or going home right away. Development firms offer greater potential for upside and are thus necessarily riskier. There is no assurance that the investments of a business in development can lead to benefit successfully. Growth stocks face larger volatility in stock prices, so they may be better suited for longer-term, risk-tolerant investors.
What type of investors should invest in growth stocks?
Growth investing is highly attractive to many investors because buying stock in emerging companies can provide impressive returns if the companies are successful. However, such companies are untried, and thus often pose a fairly high risk.
What is a value stock?
Value Stocks investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Value investors actively ferret out stocks they think the stock market is underestimating. Value stocks will sell below what they really are worth and would thus have a superior return potential. In addition, value funds do not prioritize growth above all, so investors usually benefit from dividend payments even if the stock does not appreciate it. Value stocks have a more restricted capacity for upside and, thus, investments can be better than growth stocks.
Companies with a high dividend yield, lower than industry average valuations, low price to book multiple, and high return on equity. Value stocks are typically bigger, more well-established businesses that, depending on the financial ratio or index to which they are measured, are trading below the price that analysts believe the stock is worth. For instance, the book value of the stock of a company might be 25 a share, based on the number of outstanding shares divided by the capitalization of the company. Therefore, if at the moment it is trading for 20 a share, then many analysts will regard this as a good value play.
What type of investors should invest in value stocks?
The investor identifies the best value stock, then buys it at a discount and holds it till the time it reaches its actual value to derive huge returns. Value investors don’t buy trendy stocks (because they’re typically overpriced). Instead, they invest in companies that aren’t household names if the financials check out. Value investors use financial analysis, don't follow the herd, and are long-term investors of quality companies.
Which one performs better?
At least technically, value stocks are perceived to have a lower risk and volatility level associated with them since they are typically found in larger, more developed businesses. And even if they do not return to the target price that analysts or investors expect, some capital growth can always be offered, and these stocks also pay dividends, too.
Meanwhile, growth stocks would typically refrain from paying out dividends and will reinvest retained profits back into the business to develop instead. The risk of losses for investors in growth stocks may also be higher, particularly if the business is unable to keep up with growth expectations.
For instance, if the product is a dud or if it has any design flaws that prevent it from functioning properly, a company with a highly touted new product could actually see its stock price fall. In general, growth stocks hold the highest potential reward, as well as risk, for investors.
Ultimately, the option to invest in growth vs. value stock is left to the discretion of an individual investor, as well as their personal risk tolerance, investment objectives, and time horizon. It should be noted that the output of either growth or value would also primarily depend on the point in the cycle in which the demand occurs over shorter periods.
Value stocks, for instance, tend to outperform during bear markets and economic recessions, while growth stocks tend to outperform during bull markets or economic expansion periods. Therefore, this consideration should be taken into account by shorter-term investors or those seeking market time.
Contributed by GEPL Research team
Ref article:- Investopedia, Bloomberg.com