Growth Investing vs Value Investing: Understand the Difference

Growth Investing or Value Investing? Investors often get puzzled with this question. Weighing the merits of these two competing investment styles is like choosing between Chocolate and Cake. You want both.

While both, growth stocks and value stocks have the potential to maximise your investment value, they both follow different investment approaches. Let us find out the difference between growth investing and value investing.

What is Growth Investing?

Growth investing involves investing in companies that have an ‘above average’ growth rate. These companies grow significantly faster in terms of stock prices, revenue, profits or cash flows than other companies in the market.

Growth stocks tend to have relatively high valuations as measured by price to earnings ratio or price to book value ratio.

They are more expensive than their peers because of their higher price to earnings ratio.

What is Value Investing?

Value investing involves investing in companies that are undervalued and progressing slowly but have strong underlying value.

The idea behind investing in such companies is that the market will soon recognize their value and the share prices will rise thus generating substantial returns for investors. Value investing is done based on the future growth potential of the company.

Price to earnings ratio of value stocks is generally lower than their peers but they have a strong track record.

Difference Between Growth Investing and Value Investing

· Risk

Growth stocks are considered riskier because of higher valuations and continuous price fluctuations due to market volatility. Any kind of unfavourable market condition or negative sentiment can decline the value of growth stock.

On the contrary, value stocks are considered less risky as they are characterised by a gradual move and hence there is no sudden decline or improvement in the value of value stocks. Even during poor market conditions, value stocks assure a better dividend pay record.

· Cost of Purchase

The price of growth stocks is high relative to their sales or profits. Growth stocks are more expensive owing to their future growth potential, hence investors can expect high price-to-sales and price-to-earnings ratios.

On the other hand, value stocks are less expensive as their stock prices are currently low relative to their sales or profits.

· Profits

Growth stocks continuously yield higher profits. They are more likely to beat their peers and outperform even in the future.

Whereas, value stocks currently underperform and are priced lower than their real worth. They tend to yield profits, but in the long term.

In terms of profit, growth stocks win the short-term battle, whereas value stocks win the long-term war.

· Suitable For

Growth stocks carry higher inherent risks. There is no guarantee that your investment in a growth company will successfully lead to profit. Furthermore, growth stocks experience high volatility and price swings hence they are ideal for risk-tolerant investors with a longer time horizon.

On the other hand, value stocks are promising prospects that are likely to offer better returns once the prices rebound. They are comparatively stable during poor market conditions. Moreover, they have limited upside potential and therefore can be considered safer investments.

Also Read - How to Invest in Growth Stocks?

Conclusion

Now the million-dollar question is - value investing vs growth investing, which investment strategy should you prefer?

While both, growth stocks and value stocks have different investing styles, you don’t have to necessarily choose between them. Your portfolio can have room for both. Using an ideal mix of growth stocks and value stocks can help you diversify your portfolio. Moreover, combined investments yield higher profits and have lesser risks.

For more such informative articles, follow Indira Securities. Open a demat account with us to start investing in the stock market.