Investment in stock markets can boost your wealth. But you have to regularly make a choice between different styles of investment. You can either choose growth investing or value investing. Both these styles are very popular among investors and have been adopted, researched and even written extensively about over several years.
Growth stocks are those stocks which are expected to outperform the overall markets. Investors bet on the future potential of growth stock, which is one of the most popular investment strategies. Value stocks, on the other hand, are stocks that are currently trading below their actual value and are expected to grow in the future.
The distinction between growth and value stocks comes from fundamental analysis. Let us look at each type of stock and know how to differentiate between them.
Growth vs Value Investing
Growth stocks can be found in any sector. It can be a mid-cap, small-cap or a large-cap. Stocks are considered growth stocks until they have not realized their full potential. Investors are confident of the company’s business model and are confident of their chances of expansion in the near future. Several reasons might enthuse confidence among investors such as the company’s position with respect to its competitors or expectation of a good response from the company’s next range of products.
Value stocks are usually companies with sound financials. These companies are also larger in size. Securities fall under this category when analysts believe that they are trading below its actual worth. For instance,
the book value — company’s asset minus its total liability — of a company is Rs 30 a share and its shares are currently trading at Rs 20 a share, analysts might consider investment in such stocks as value investing.
When do stocks get undervalued?
Stocks may sometimes undergo a sudden and sharp erosion in its value. In the day and age of 24 hour media coverage, a rumour or news story critical of the company’s management may come out and cause a panic sell-off.
Often a promoter of the company may earn in his personal capacity, causing some reaction on the stocks. However, if the company’s financials are sound, downward movement of price in such scenarios become entry points for value investors.
If no significant damage is done to the company’s finances, value stocks tend to recover with time as negative sentiments are slowly forgotten and people focus on the fundamentals of the company to make buy or sell decisions.
Not all stocks can be categorized as value stock or growth stock. Some show mixed traits and are considered to be undervalued and also have strong potential in the long term.
Growth vs Value Investing; How to go about it?
There are two ways you can invest in value stocks or growth stocks. One, you can invest in individual stocks, second, you could purchase mutual funds or exchange-traded funds.
If you are buying individual stocks, you are in control of your portfolio and can invest in value or growth companies. Investing in mutual funds would give the fund manager the responsibility to allocate the assets in different value or growth stocks.
Investors who wish to invest in both growth and value stocks can invest in blended funds, which have the mix of both types of stocks.
Which investment style should you adopt?
Since value stocks are usually found among established and stable companies, they are considered to be less risky than growth stocks. Besides, values are more likely to pay dividends to investors.
Growth stocks, however, rarely pay dividends. They reinvest the earning to fuel growth. Such companies might be risky to invest in. Growth stocks may provide returns but also cause loss depending on their products performance. Therefore growth stocks usually possess the highest potential reward, as well as risk.
Therefore, an investor’s choice depends on the individual’s ability to bear risk, his or her long term and short term goals. Besides, the short term trend, both for growth stocks and value stocks depend on the stage of the cycle the market is in. Experts also believe that value investing and growth investing strategy can go hand in hand. Both the styles can complement each other too. If you are an investor looking for the right advice according to your needs and goals, it is time to turn to Tata Capital which is home to experts with in depth knowledge and experience for this task.