There are two fundamental approaches that most investors use while investing in stocks or mutual funds. They are growth investing and value investing. Both the approaches have their own merits and fulfil the common goal of maximising the investment value for its investors. Also, investors prefer a mix of these approaches when investing in stocks or mutual funds to diversify their portfolios. This article will cover the differences between value investing vs growth investing.
What is Value Investing?
Value investing is another investment approach that involves purchasing stocks or securities that are underpriced. In other words, this approach helps identify stocks that are trading below their intrinsic value. Through fundamental analysis, investors can identify the company’s intrinsic value. Also, this approach helps in capitalising the potential profits by purchasing shares at low prices. However, these companies have good potential despite being unpopular and undervalued. Therefore, holding these stocks for longer durations is a key to earning better returns from the value investing approach.
What is Growth Investing?
Growth investing is an investment approach that emphasises on companies projecting a higher growth rate. These companies have good revenue growth and a proven track record or young companies with a potential to grow. Also, these companies have reported better than average returns in recent years. Moreover, investors may pay a high price to buy these growth stocks. However, they are expected to sell at an even higher price as the company grows. Therefore, growth investing requires analysis of the company’s historical performance and overall management to assess the possibility of generating returns in future.
Recommended Read: What are Growth Funds?
Value Investing vs Growth Investing : Which is Better?
The following are the differences between Value Investing and Growth Investing.
|Stocks are undervalued
|Stocks are overvalued
|Companies have low PE ratio
|Companies have an above-average PE ratio
|Stocks have a high dividend yield
|Stocks have low dividend yield (or no dividends)
|Stocks are at low prices, and stocks of these companies bounce back in time when the true value is recognised
|Stocks are at higher prices, and investors are willing to pay with an expectation of selling at an even higher price
|The stocks take time to turn around and may have less price fluctuation than growth stocks
|The stocks can sharply fall on any negative news in the market, making it more volatile
Who Should Opt for Value Investing?
It takes much time, effort and market awareness to find the correct stock and purchase them at the right time. Therefore, value investing strategies are suitable for investors who find the process of selecting value stocks overwhelming.
Value stocks are expected to perform better in the long run due to their strong intrinsic value and company fundamentals. Over a period, the stock value can increase or decrease. Therefore, investors with a long-term investment horizon can prefer a value investing strategy. Moreover, investors with high exposure to growth stocks can opt for value stocks to give stable returns in any market cycle.
However, most investors prefer creating a strategy that combines growth and value investing strategies to generate wealth in the long term. Also, SIP and long-term investing is a perfect combination for wealth creation. This will help them reduce their average cost of investing and, in turn, boost their returns through compounding.
Therefore, growth vs value investing strategies enables investors to benefit from the economic cycles through value or growth stocks which helps a smooth return on investment. More importantly, choosing any specific investment approach depends on the investor’s risk tolerance levels and financial objectives.
Who Should Opt for Growth Investing?
Growth investing is a long-term investment strategy. Hence this strategy is suitable for investors with an investment horizon of at least 10 years. Also, investors who are aggressive with their investment strategy can consider growth stocks. Furthermore, these stocks are affected by market movements and exposed to high market volatility, making them riskier bets. Therefore, investors who understand the risk of this strategy can consider investing in them.