Do you want to invest in the stock market? There are multiple options to invest in. Out of these, people prefer value or growth investment. You can build a stable portfolio with Growth Stocks and Value Stocks. One of these provides a high valuation while the other, a low valuation. To understand both these investment choices, you need to read further.
What Is a Growth Stock?
When a company grows rapidly than its competitors, it is termed a Growth Stock. Also, it fares much better than the industry average. The growth is 3-5x measured from Revenue or Profits. The measurement past 3 to 5 years is accounted for mostly. Sometimes the growth rate is also counted as how quickly the company is acquiring market share in its field. Or, it can also indicate how quickly it is attracting customers.
As understood, the value of Growth Stocks is quite high. It also trades at a high value as much that it may cross the price-to-earnings of a company manifold times. So, the growth of these stocks every year is exponential. It is not surprising that these stocks provide growth of over 15% to 20% in a year compared to other stocks that grow gradually at a pace of 3-7% every year. This is the reason why people investing in Growth Stocks do not worry much about the value at which the stocks trade.
The stocks anyway trade at a high value or over their intrinsic value. The person investor is more interested in the company’s constant growth, the market price of the stock, and its profit and revenue. Compared to competitors, the earnings of these companies are so high that people expect these stocks to always sell at a high PE valuation. So, investors easily want to purchase these companies, even if it costs a lot.
What Is a Value Stock?
Some people believe in the intrinsic value of a company rather than how quickly the stock’s value grows. Value Stocks are the companies that have a slow growth rate. They have a low market price. Also, the stocks have a low valuation in trade. The investors purchase the company at a low price. Such companies may trade below their true market value and potential.
So, the fundamental idea is to find the intrinsic value of a company by analyzing the annual or quarterly reports. The person believes that because the company’s intrinsic value is high, the stock will rise gradually in the future even its true worth is realized in the market. So, the investor will hold these stocks until their value grows in the market to its true worth.
Before investing in stocks, value investors consider the Price to Book Value (PBV) Ratio and Price to Earnings (PE) Ratio. These two ratios help to evaluate an undervalued stock in the market. Here, the investor prefers putting money in stocks with a lower PBV ratio and PE ratio.
Which Is Better – Value Stock or Growth Stock?
Investing in any of these stocks will earn you returns. But, which one you choose depends on your financial goals. Investors purchase Value Stock based on its intrinsic value. You can purchase it at a discount. Though the earnings are small, you can profit from it when the stock reaches its true intrinsic value. Growth Stock is purchasable at a fair to high price. These bring huge returns.
Also, these have a higher valuation and PE ratio than Value Stock. These also give low or no dividends, while Value Stocks provide moderate to high dividends. Value investing gives low returns, but it is a safer approach. As you can buy these stocks at a lower price, it gets more lucrative for you. The companies also give stable dividends.
Growth Stock gives an immense return. But the capital appreciation does not depend on the intrinsic value of the company. As long as the organization maintains a fast growth rate, and acquires more customers, the value of Growth Stock increases.
To Sum it Up
So, how do know which of these stock types is better? Everything boils down to risk factors, your preference, and your investment strategy. It is always best to maintain a mix of dividend and value stock. This will assist to hedge the risk and get maximum returns.