Learn more about the two types of stocks to invest in
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In this article, we will talk about the key features and differences between growth stocks vs value stocks.
Definition
Growth stocks are stocks that come with a substantially higher growth rate compared to the mean growth rate prevailing in the market. It means that the stock grows at a faster rate than the average stock in the market, consequently generating earnings at a faster rate.
Value stocks are stocks that are being traded at a value lower than their intrinsic value. It basically means that such stocks are undervalued. Undervalued stocks are traded at a price lower than their true value.
Pricing
Growth stocks are often relatively correctly valued or sometimes even overvalued, because of their significantly high growth rate. Hence, they are higher priced in the market. The act of investing in growth stocks is known as growth investing, i.e., investing in stocks that experience continued growth.
Value stocks are undervalued stocks that have the potential to grow and generate returns in the future substantially. Hence, they are priced much lower than similar stocks in the market. The act of investing in value stocks is known as value investing, i.e., investing in stocks that are undervalued but with the potential to generate revenues when the market corrects its price.
Investment Metric Ratios and Risk
Growth stocks come with higher metric ratios, like P/E ratio, P/B ratio, and earnings per share (EPS). Growth stocks carry relatively lesser risk because their growth rate is high and increasing. They are relatively less sensitive to adverse economic conditions than the overall market. Hence, growth stocks are relatively less risky investments.
Value stocks come with lower metric ratios because they are undervalued. Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn’t appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.
Business Profile and Dividends
Growth stocks are usually up-and-coming companies. Such companies usually introduce something new and innovative to the market and are growing increasingly, owing to their unique selling proposition (USP) and competitive advantage.
Growth stocks usually pay very little or no dividends at all. It is because such companies usually follow a reinvestment protocol wherein they reinvest all their retained earnings back into the company.
Value stocks are usually large, well-established companies that are undervalued for a variety of reasons, such as negative PR, a bad earnings season, and so on, but eventually gain back value in the long term. Value stocks usually pay dividends well and don’t reinvest the entirety of their retained earnings back into the company.
More Resources
CFI is the official provider of the global Capital Markets & Securities Analyst (CMSA)® certification program, designed to help anyone become a world-class financial analyst.To keep advancing your career, the additional CFI resources below will be useful:
FAQs
The definition of growth versus value stocks is simple, at least in theory. Value companies generally have low price-to-book ratios, high dividend yields, and low price-to-earnings ratios; the opposite is true for growth companies. In practice, however, the distinctions are sometimes blurred.
Are growth stocks better than value stocks? ›
Historically, value investing has outperformed growth investing over the long term. Growth investing, however, has been shown to outperform value investing more recently. One recent article noted that growth investing had outperformed value investing over the last 25 years.
Is the S&P 500 more growth or value? ›
In US Equity, we typically offer three funds: a large-cap, a mid-cap, and a small-cap fund. Our large-cap fund is a simple S&P 500 index fund. Historically, the S&P 500 has been considered a 'blend' of growth and value, as defined by Morningstar.
Which is riskier growth or value stocks? ›
Value stocks are expected to gain value eventually when the market corrects their prices. In the unlikely event that the stock doesn't appreciate in value as was expected, investors can lose their money. Hence, value stocks are relatively riskier investments.
Is growth or value better for 2024? ›
The intrigue deepens when we consider the anticipated decline in interest rates for 2024. According to conventional wisdom, this should herald another favorable year for growth stocks relative to value.
What is the disadvantage of growth stocks? ›
Disadvantages of growth stocks
- The risk potential always follows the potential returns. ...
- High valuations make some investors nervous. ...
- Foregone dividend income adds opportunity cost.
For example, value stocks tend to outperform during bear markets and economic recessions, while growth stocks tend to excel during bull markets or periods of economic expansion. This factor should, therefore, be taken into account by shorter-term investors or those seeking to time the markets.
Does Warren Buffett outperform the S&P? ›
CEO Warren Buffett is widely considered a legend on Wall Street, and for good reason. The conglomerate's portfolio has substantially outperformed the benchmark S&P 500 since Buffett became CEO in 1965.
Is Warren Buffett a value investor? ›
In an investing career that spans eight decades, Buffett has relied heavily on the strategy of value investing, a now widespread school of thought adopted by investors seeking to emulate his vast success. Also here are Buffett's seven rules of investing.
Why is the S&P 500 not a good investment? ›
One of the limitations of the S&P and other market-cap-weighted indexes occurs when stocks in the index become overvalued. They rise higher than their fundamentals warrant. The stock typically inflates the overall value or price of the index if it has a heavy weighting in the index while being overvalued.
The vast majority of penny stocks will instead provide you with substantial volatility, unpredictability, and big losses if you are not careful. Stocks that trade on OTC Pink market typically have little working capital and often provide scant information to investors about their financial condition.
Do growth stocks pay dividends? ›
A growth stock is any share in a company that is anticipated to grow at a rate significantly above the average growth for the market. These stocks generally do not pay dividends.
Do value stocks pay dividends? ›
Value stocks often pay dividends to investors. Unlike growth companies, they don't need to reinvest as much of their profits in their businesses. That means they can afford to return cash to shareholders.
Should I invest in growth or value stocks now? ›
The question of which investing style is better depends on many factors, since each style can perform better in different economic climates. Growth stocks may do better when interest rates are low and expected to stay low, while many investors shift to value stocks as rates rise.
Will 2024 be a good year for the stock market? ›
Analysts project 11.5% earnings growth and 5.5% revenue growth for S&P 500 companies in 2024. Fortunately, analysts see positive earnings and revenue growth for all eleven market sectors this year.
Should I invest in growth or value ETFs? ›
The choice to focus on either value ETFs or growth ETFs comes down to personal risk tolerance. Growth ETFs may have higher long-term returns but come with more risk. Value ETFs are more conservative; they may perform better in volatile markets but can come with less potential for growth.
Do growth stocks beat the market? ›
Growth Stocks Have Dominated the Market
Investors define growth stocks as companies with the potential to outperform the market down the road, even if they may be unprofitable or expensive now. That means a lot of potential rewards for investors, but a lot of risk too.
Should I invest in growth or dividend stocks? ›
Investors often face a choice between Dividend Growth stocks and High Yield stocks when seeking income-generating investments. While High Yield stocks offer attractive immediate returns, Dividend Growth stocks provide superior long-term benefits, including income growth, capital appreciation, and lower volatility.
Which is better growth or income stocks? ›
GROWTH IS USUALLY THE MAIN POINT of an investing strategy. But, depending on your goals, income-producing investments may be equally if not more important.
What is the truth about growth and value stocks? ›
For the value index, the median ROIC, averaged over three years, and excluding goodwill, is only 15 percent, compared with 35 percent for the growth index (Exhibit 2). In other words, the average growth stock is likely to deliver twice the average value stock's book return on capital.
