Growth Vs Value Investing
by: JOHN DOE
on: DECEMBER 2, 2022
in: BLOG
There are two investing styles: value and growth. Growth investors invest in companies that offer strong earnings increase while 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 as they both help diversify your portfolio.
Value Investing
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. They bet on the
fact that the price will 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).
Principles of Value Investing
Invest in businesses, not stocks
Value investors tend to ignore new trends in stock prices and other market speculations. Instead, they look at the fundamentals of the company that the stock represents.
Only invest in companies you understand
Value investors typically avoid investing in companies they do not have adequate information about.
Love the business you buy into
More than being a source of expected earnings, value investors do not pick a stock based on surface market research. They love the business and fully understand its values and direction.
Do not worry about diversification
If a value investor wants to invest more capital, the aim is often not to diversity but finding investment plans that are better than the ones they already own.
Ignore the market
Value investors approach buying stocks like buying businesses, so they hold on to them for as long as the companies’ fundamentals are strong.
Growth Investing
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. Considering that this is not guaranteed, it is therefore a risky type of investment.
What to know before investing
Invest in hot sectors
One way growth investors approach investing is to invest in stocks, and mutual funds based on specific sectors and industries that produce above-average returns for publicly traded companies.
Understand the company’s earnings
Growth investors try 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
This is used by growth investors to compare a company’s book value to its market value as this comparison can indicate whether a stock is undervalued or overvalued.
High-risk growth investments
Growth investing is high-risk, so it is often not recommended for investors with a low-risk appetite. 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.
