India has seen a steady rise in people investing in the stock market. The reason? Great returns and an excellent potential for growth. There are two major investing strategies people choose from: growth and value investing.
The main difference between the value stocks vs. growth stocks debate is in the stock valuation. While one involves sprinting towards a bright future, the other entails carefully walking down a tried and tested road. Typically, investors with a high-risk appetite pick the first, while others choose the second route.
In this article, we will look at the features of both these investment styles to help you select the best route.
Growth vs value - What is the difference?
The key difference between value stocks vs growth stocks is that growth stocks are those that investors think are currently overvalued. They have the potential to deliver better-than-average returns. For example, suppose you are at a popular store and want to purchase an antique item. You know this item will be available at another less-famous store for a significantly lower value.
The item is being sold for a price that exceeds its actual value. Similarly, stocks might be traded for a higher value than their actual value.
On the other hand, value stocks are those that the investors feel are undervalued. Now, assume you are at a flea market where you know the item is being sold for less than it is worth. The item in this case will be undervalued. Similarly, stocks can be undervalued, and the investor might buy it to sell it at a higher value later when the stock comes to its true worth.
There are also value and growth mutual funds, which consist of value and growth stocks, respectively. In the following section, let us look at value investing vs. growth investing in greater detail.
Value vs growth stocks at a glance
The first thing to look at between the two types of stock trading is their price. The price of value stocks is currently undervalued, and that of growth stocks is overvalued. Value stocks generally have a low price-to-earnings ratio, while growth stocks have an above-average ratio.
Another difference that separates the two stocks is the dividend. Value stocks give high dividend yields, while growth stocks provide low to no dividend yields. Lastly, value stocks have low volatility, while growth stocks have high volatility.
Value investing defined
Value stocks are those that are currently undervalued in the market. These stocks have a low price currently but have the potential to grow in the future. The reasons behind the undervaluation can vary from something as basic as a short-term business crisis to a long-term industry-wide depression.
The price of these stocks is bound to rise as soon as other investors realise their growth potential. These stocks usually have a low price-to-earnings ratio. However, the risk associated with these stocks is that they might not appreciate as anticipated.
Growth investing defined
In growth investing, investors pick the stocks already at a high price, often the leaders in their industry. These are similar to the multibagger stocks that might give extremely high returns. The idea behind investing in these stocks is that they might rise further based on their past above-average performance.
The stocks usually have a high price-to-earnings ratio and pay less or no dividends. The risk with these investments is that an unforeseen challenge could cause their prices to fall. If the share price is too high, you can consider buying growth stocks when the company offers a stock split.
How growth and value investing overlap?
Sometimes, a stock can be included in value and growth stocks. This is because the features of the two stocks can sometimes overlap. For example, a stock that was undervalued at one point can become overvalued and move from value to growth.
You must understand that investors' targets are the same. Even in the value vs. growth stocks debate, investors wish to buy stocks at a low price and sell them at a higher price to earn profits. The destination is the same, but the path differs.
Investing in growth and value stocks
The market might sometimes favour growth investments, while it may favour value investments in other instances. Both investments work on anticipation and have no guarantee. As a result, it is ideal to invest in both types of stocks in a balanced way. This helps in diversifying the portfolio.
Additionally, you can benefit from the profits of both stocks in this manner. It is essential to rebalance the portfolio to maintain your preferred allocation and be in sync with your investing strategy.
Common misconceptions
It is a common misconception that investors must be either growth or value investors. While it is essential to understand the features of both, a balanced portfolio is the best option.
If you hand-pick stocks for your portfolio, you can have a combination of growth and value stocks. The value vs. growth investing division might also depend on the industry you invest in. Usually, IT and tech stocks comprise growth stocks since they are large-cap stocks and are overvalued. On the other hand, the finance sector mostly has value stocks.
Conclusion
Growth stocks already have a sound performance track and might grow in the future, while value stocks are emerging stocks in the market with good growth potential. You must understand this difference before investing.
While you can choose between the two depending on your investment strategy, it is recommended that you balance your portfolio with both stocks instead of thinking about value stocks vs. growth stocks. Ultimately, remember that the motto behind both investments is the same. Balance your portfolio to benefit from both types of stocks, as there can also be overlaps between the two.
