Value and growth are two fundamental styles or approaches in investing in mutual funds and stocks. Growth investors search for companies that provide strong growth in earnings. Value investors, on the other hand, look for stocks that seem undervalued in the market. Since the two styles work well when combined, you can use them together to diversify your portfolio.
Definition of Value and Growth
A growth stock represents a company that showed gains in earnings that are better than average for the past few years and are expected to continue providing high profit growth levels even though there are no definite guarantees. An emerging growth company is one with the potential of achieving high growth in earnings but hasn’t established a solid history of significant growth in earnings yet.
The main characteristics of a growth fund include the following:
- Records of high growth in earnings – Although the earnings of certain companies might be depressed when there are slower economic improvement periods, a growth company might potentially continue achieving high earnings growth whatever the economic condition might be.
- Price is higher than the broader market – Investors have the willingness to pay the high multiples of price to earnings expecting to sell them at much higher prices as companies continue growing.
- More volatile compared to the broader market – One risk in purchasing a particular growth stock is that its high price might fall sharply when there are negative news regarding the company, specifically if the earnings are a disappointment for Wall Street.
A value fund manager, on the other hand, looks for those companies that fallen out of favor with still good enough fundamentals. Value groups might also include the stocks of those new companies that investors haven’t recognized yet.
The primary characteristics of a value fund include:
- Priced lower than similar companies in the industry – Most value investors have a belief that majority of value stocks ate made because of the overreaction investors to some recent issues in the company like legal problems, negative publicity and disappointing earnings that can all raise doubts regarding the long-term prospects of the company.
- Lower priced compared to the broader market – The concept of value investing is that the good companies’ stocks are going to bounce back right in time when and if other investors recognize the true value.
- Risk is somewhat lesser than the broader market – As value sticks take time turning around, they might become more suitable for long term investors and might carry more risks of fluctuation in price compared to growth stocks.
Value or Growth or Both?
Which strategy between value and growth will likely produce higher returns in the long run? The fierce battle between value and growth investing has long been a hot topic of discussion as both sides offer statistics to support their arguments. But, if you want to invest long term, there are people who combine value and growth funds or stocks to enjoy potentials of less risk with high returns.
Source:
“Growth vs. Value Investing? Perhaps You Should Consider Both Approaches.” Merrill Edge, www.merrilledge.com/article/growth-vs-value-investing-two-approaches-to-stocks.
