Growth vs Value investing: All you must know about two stock market approaches

Summary

  • Growth and value investing are two approaches employed by stock market investors.
  • Growth stocks generally outperform the markets, while value stocks are known to have robust fundamentals.
  • Many long-term investors generally combine growth and value stocks for higher returns with less risks throughout the economic cycles.

Investing in stock markets might not be rocket science, but then it is not a cakewalk either. The art of stock picking requires nuanced understanding of various elements and approaches. Growth and value are generally two types of approaches used in stock market investing. The two investing styles have their own merits and demerits. But both fundamental approaches seek to maximise the value of investment for investors.  

A smart investor knows that a right investment approach uses a mix of two investing styles. While both growth and value investing complement each other, they can help to diversify the investment portfolio when used in unison. But investors must also know when to use which approach while parking their hard-earned money into the stock markets.

Just being a blind follower does not ever serve any purpose – be it in stock market or in life. A smart investor always analyses the investing techniques in detail before moving ahead with his preferences in the stock market.

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What is growth and value investing?

Growth stocks generally outperform the overall markets for a given period. These stocks represent companies that have reported higher-than-expected profits and are expected to deliver higher earnings in the future as well.

Growth stocks include small, mid, and large cap companies. Since these stocks are known to outperform the markets, many newbies are highly allures by them.  Investors generally pay higher price-to-earnings multiples for these stocks in the expectation of selling them at much higher prices.

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However, investors should also know that with high return comes high risk. Growth stocks are volatile. So, they have higher risk involved at any time of trading.

Value stocks belong to companies with strong fundamentals. These may include stocks which may have fallen out of favour among investors but still boast of robust fundamentals.  The category may also include new companies that are yet to earn recognition among investors.

Value stocks represent the established companies that generally trade at a discount to either the price to earnings (P/E), or book value (BV) ratios. They are considered to carry less risk than the broader market, when compared with growth stocks.

Generally, value stocks are more customised for long-term investors since they take time to turn around. These are more affected by price fluctuations compared to growth stocks.

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Growth or value or both?

These two respective sub-sectors of stocks must always be compared on a historical basis to analyse the returns. The investors must also consider risk endured and volatility seen to probe the results.

As already discussed, value stocks carry lesser risk and volatility associated with them is also lower compared to growth stocks. Even if such stocks do not regain the target price predicted by the analysts or investors, these still manage to offer some capital growth. Value stocks are known to offer dividends.

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On the other hand, growth stocks generally do not pay dividends and reinvest the profits back into the company to expand. These stocks also carry greater risk, especially if the company is unable to match the growth expectations. Growth stocks generally come with a potential reward and risk for investors.

What history shows

Growth stocks perform better when interest rates decline, and company earnings surge. But these stocks have also feel the heat when economy slows down. So, growth stocks have generally performed well during periods of economic expansion or periods of bull markets.

Value stocks perform positively during economic recovery. However, these stocks remain weak during a long bull cycle.

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Investor’s choice

Many long-term investors generally combine growth and value stocks for higher returns with less risk.  Such investors reap profits throughout the economic cycles since general market situations favour either the growth or value investing approaches. A smart investor is the one who invests considering his risk-appetite, investment targets and time horizon.

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