Any smart investor will tell you that there is more than one way of investing in stock market and they will mix different investment approaches to make the most of the existing market conditions.
Growth and value investing are two popular approaches to investing, and both have their own distinctive features. The goal of these two different investment techniques, just like any other, is to maximise returns on the funds you have invested in.
Growth stocks are companies that are expected to outperform the overall market over time, considering their future potential. On the other hand, value stocks are the companies that are presently trading below their intrinsic value and are expected to provide a superior return when the market price converges with its true intrinsic value.
Growth investing vs value investing
Growth investing is when you, as an investor, identify companies that have the potential to grow faster than the others, in terms of revenues. Growth stocks can be found in small, mid, or large-cap sectors. These growth companies are supposed to have a greater chance of expansion in the following years.
Value investing is when you identify and invest in companies that are underrated but have a strong underlying value. Value stocks are generally more extensive, well-established companies trading below their potential price. You, however, might draw a conclusion that the stock is worth investing in depending on different benchmarks. These stocks can be undervalued for many reasons.
It is important to note that some of these stocks could be classified as a mix of both the categories.
Value stocks vs growth stocks: Which stocks are preferable?
When comparing the two, your preference should be based on the time horizon, risk endured, and volatility.
Value stocks have lower volatility and risk because they are usually seen among large-sized and well-established companies. Even if these stocks cannot return to the target price predicted, they may still offer capital growth and pay dividends.
Growth stocks generally refrain from paying dividends and instead reinvest the retained earnings back into a company and help it expand. In growth stocks, if a company is unable to keep with the growth expectations, the probability of loss may be greater than value stocks.
Studies on value and growth stocks
In a 2013 study by research analyst John Dowdee, the risks and returns for value and growth stocks (in small, mid, and large size companies) were examined from July 2000 to 2013. In the beginning, value stocks seemed to outperform growth stocks, irrespective of being more volatile than the growth stocks. Later, from 2007-2013, growth stocks showed higher returns in all three caps. The researcher thus concluded that the study provided no sure answer.
Craig Israelsen published a study in 2015 that talked about the performance of value and growth stocks over 25 years, 1994-2014. The returns showed that the average annual return from large-cap value stocks exceeded three-quarters of a percent of large-cap growth stocks. The difference increased as he moved to the mid and small-cap stocks.
Value vs growth stocks – Which ones to choose?
Selecting growth or value investing depends on your preference. It is also based on your risk tolerance, goals of your investment, and the time horizon. If you are looking to invest in stock market without having to drown yourself in different studies, it is prudent to reach out to a financial expert to curate customised financial plans that are based on your investor profile.
Reach out to one today!