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Value and growth refer to two categories of stocks and the investing styles built on their differences. Often growth and value stocks and investing styles are pitted against each other as an either-or option. But portfolios have room for both, and finding the right blend of value stocks and growth stocks can lead to increased diversification.
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Growth vs. value: What's the difference?
The main difference between growth and value stocks is that value stocks are companies investors think are undervalued by the market, and growth stocks are companies that investors think will deliver better-than-average returns. There are also growth mutual funds and value mutual funds, which hold growth and value stocks respectively.
Before you opt for a stock or mutual fund of the growth or value variety, here’s what you need to know about each school of thought, starting with a comparison of the major differences.
Value vs. growth stocks at a glance
Value stocks | Growth stocks | |
Price | Currently undervalued. | Currently overvalued. |
PE ratio | Generally low PE ratios. | Above-average PE ratios. |
Dividends | Generally high dividend yields. | Low dividend yields (or no dividend). |
Risk | May not appreciate as much as expected. | Relatively high volatility. |
Value investing defined
Value investors are on the hunt for hidden gems in the market: stocks with low prices but promising prospects. The reasons these stocks may be undervalued can vary widely, including a short-term event like a public relations crisis or a longer-term phenomenon like depressed conditions within the industry.
Such investors buy stocks they believe are underpriced, either within a specific industry or the market more broadly, betting the price will rebound once others catch on. Generally speaking, these stocks have low price-to-earnings ratios (a metric for valuing a company) and high dividend yields (the ratio a company pays in dividends relative to its share price). The risk? The price may not appreciate as expected.
» Read up on finding good cheap stocks
Benjamin Graham is known as the father of value investing, and his 1949 book “The Intelligent Investor: The Definitive Book on Value Investing” is still popular today. One of Graham’s disciples is the most famous contemporary investor: Warren Buffett.
Growth investing defined
Growth investors often chase the market’s high fliers. You’ve likely seen the disclaimer from financial companies that past performance isn’t indicative of future results. Well, this investing style is seemingly at odds with that idea.
It’s essentially doubling down: Investors bet a stock that’s already demonstrated better-than-average growth (be it earnings, revenue or some other metric) will continue to do so, making it attractive for investment. These companies typically are leaders in their respective industries; their stocks have above-average price-to-earnings ratios and may pay low (or no) dividends. But by buying at an already-high price, the risk is that something unforeseen could cause the stock’s price to fall.
This style’s “father,” Thomas Rowe Price Jr., developed his philosophy in the 1930s and later went on to found the asset management firm that still bears his name: T. Rowe Price.
» See our list of best performing stocks
How growth and value investing overlap
Each school has devoted followers, but there’s a lot of overlap. Depending on the criteria used for selection, you’ll see stocks that are included in both value and growth mutual funds. What gives?
In part, it’s much ado about a distinction that’s not set in stone. For example, a stock can evolve over its lifetime from value to growth, or vice versa.
It’s also worth noting that investors in the value versus growth debate have the same goal (buy low and sell high); they’re just going about it in different ways.
Value investors look for companies that have already earned their stripes and have a stock price that’s lower than it should be (and may rise again to reflect that). Growth investors look for companies with future potential and expect the stock price to increase (even if it’s already relatively high) as the companies reach or exceed that potential. Same desired destination, different ways of getting there.
» Dive deeper: How to research stocks
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Investing in growth and value stocks
The stock market goes through cycles of varying length that favor either growth or value strategies. The stocks in the Russell 1000 Growth index outperformed those in the Russell 1000 Value index during the 2009-2020 bull market, but that’s not always the case on a year-by-year basis.
What’s an investor to do? One option is to invest in both strategies equally. Together, they add diversity to the equity side of a portfolio, offering potential for returns when either style is in favor.
Because the market goes in value-growth cycles, think about your investing strategy, and consider rebalancing periodically so your portfolio stays in your preferred allocation.
Common misconceptions
In addition to the myth that investors must be growth or value purists, it’s also important to realize these styles often whittle down to industry. Many growth stocks tend to be in tech or IT; value stocks are frequently in the financial sector. This breakdown makes sense: The country’s major financial institutions are far more established than the relatively new leaders in information technology.
Finally, understand that effective diversification matters more. Some investors who piece together a portfolio by stock picking might stumble upon growth and value unintentionally.
Bought stock in a large, 100-year-old company during a market dip? That may have been a value investing move. Jumped on a pricey, hot stock that’s been soaring in recent years? You just became a growth investor. But either way, you’re buying into the stock market, betting you’ll be able to sell those shares at a higher price at a later date.
» Need a brokerage account? View our picks for the best brokers for stock trading
I am an expert and enthusiast-based assistant. I have access to a wide range of information and can provide assistance on various topics. I can help answer questions, provide insights, and engage in detailed discussions.
Regarding the concepts mentioned in the article you provided, let's discuss each one in detail:
Growth vs. Value Stocks:
The main difference between growth and value stocks lies in the perception of their future performance. Value stocks are considered undervalued by the market, and investors believe that their price will eventually increase. On the other hand, growth stocks are companies that investors expect to deliver better-than-average returns due to their potential for future growth.
Growth and Value Investing:
Both growth and value stocks have their respective investing styles. Value investing involves searching for stocks that are currently undervalued but have promising prospects. Value investors believe that the market has not recognized the true value of these stocks and expect their prices to rebound in the future. Value stocks often have low price-to-earnings ratios and high dividend yields.
Growth investing, on the other hand, focuses on investing in companies that have already demonstrated above-average growth and are expected to continue growing. These companies are often leaders in their industries and may have above-average price-to-earnings ratios. Growth stocks may pay low or no dividends.
Overlapping of Growth and Value Investing:
While growth and value investing are often seen as distinct styles, there is a significant overlap between the two. Depending on the criteria used for selection, stocks can be included in both growth and value mutual funds. Additionally, stocks can evolve over time, transitioning from value to growth or vice versa. The ultimate goal of both growth and value investors is to buy low and sell high, but they approach it in different ways.
Investing in Growth and Value Stocks:
The stock market goes through cycles that favor either growth or value strategies. During certain periods, growth stocks may outperform value stocks, while in other periods, the opposite may be true. One option for investors is to invest in both growth and value strategies equally. This approach adds diversification to the portfolio, allowing for potential returns when either style is in favor. It is also important to periodically rebalance the portfolio to maintain the desired allocation.
Common Misconceptions:
There are a few common misconceptions about growth and value investing. Firstly, investors do not necessarily have to be purists and choose only one style. They can unintentionally invest in both growth and value stocks based on their stock-picking decisions. Secondly, growth stocks are often associated with the tech or IT sector, while value stocks are frequently found in the financial sector. However, this breakdown is not set in stone, and stocks from various industries can fall into either category. Lastly, effective diversification is crucial, and investors should focus on building a well-diversified portfolio rather than strictly adhering to one investing style.
I hope this information helps you understand the concepts discussed in the article. If you have any further questions or need more information, feel free to ask!