In many financial circles, investing is divided into two styles: value and growth. For growth investors, the goal is to invest in companies that offer strong earnings increase. Value investors, on the other hand, invest in stocks that are undervalued in the marketplace. Worthy of note, however, is the fact that, these two investment styles complement each other, and investing in them helps to diversify your portfolio.
Value investors buy stocks that are under-priced, perhaps due to a media management crisis, or product malfunction, either within a specific industry or the broader market, betting on the price to rebound due to a predicted change in the company’s image.
These stocks have low price-to-earnings ratios (a company valuation metric) and high dividend yields (what a company pays in dividends relative to its share price).
Growth investors invest in companies that have recorded recent better-than-average rise in earnings and are expected to continue delivering high levels of profit increase. Although, this is not guaranteed, which makes it a risky type of investment.
Principles of Value Investing
Invest in Businesses, Not Stocks. Investors must ignore new trends in stock prices and other market speculations. Instead, they should look at the fundamentals of the company that the stock represents.
Only Invest in Companies You Understand. As an investor, it is not advisable to invest in companies you do not have adequate information about.
Love the Business You Buy Into. More than being a source of expected earnings, investors shouldn’t pick a stock based on surface market research. It is important to love the business you are buying into, fully understand its values and directions. These details also help in deciding on stocks to buy.
Do Not Worry About Diversification. Should a value investor be willing to invest more capital, the aim should not be diversity, but finding investment plans that are better than the ones they already own.
Most Times Ignore the Market. Value investors must approach buying stocks like buying businesses, so that they can hold on to them for as long as the companies’ fundamentals are strong.
What To Know Before Investing
Understand the Company’s Earnings. For growth investors in stocks, it is important to understand a company’s net and historical earnings because it can provide insight on the chances of the company generating higher future earnings.
The Price-to-Earnings Ratio. This is important for growth investors who are trying to compare companies that operate in the same industry. The higher the P/E ratio, the greater the risk investors are willing to take on a company because of its expected earnings and growth.
The Price-to-Book Ratio. It is advisable for growth investors to compare a company’s book value to its market value because this comparison can indicate whether a stock is undervalued or overvalued.
High-Risk Growth Investments. Investing in high-risk growth or speculative investment is not advisable for investors with a low risk threshold. It is best suited for investors who are looking for maximum profits within a relatively short time frame and have enough investment capital to sustain them during possible periods of dips.
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