Growth Or Value Investment

Updated on: 3 November 2019 6:42 pm

Have you ever been asked the question whether you are a growth investor or a value investor? Or have you ever wondered which approach to investing is better, growth or value? If you are an equity investor, then chances are that at some point in time or the other you must have heard of the terms growth and value. Growth and value investing are the two primary approaches to investing in equity or equity mutual funds. Growth investors, as the name suggests, seek to invest in stocks that offer a strong future earnings potential while value investors seek to invest in stocks that are available at a discount to their expected fundamental value. However, instead of a growth versus value debate, investors should choose to invest in both kinds of stocks as the two styles complement each other and can help diversify your portfolio when used together.

Growth stocks represent companies that have in the recent past delivered better-than-average earnings growth and are expected to continue delivering high levels of profit growth in the future.

Key Characteristics of Growth Stocks

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- Higher priced than broader market. Since these companies have demonstrated an ability to deliver higher growth rates, investors are generally willing to pay high price-to-earnings multiples for them. The expectation is that the company will continue to grow and that the investor will be able to sell the stock at even higher levels.

- Highearnings growth records. While the earnings of some companies may be depressed during periods of slower economic improvement, growth companies may potentially continue to achieve high earnings growth regardless of economic conditions

- More volatile than broader market. The risk in buying a growth stock is that you have already paid a high price for it and any negative surprises or earnings disappointments can have a sharp impact on the stock price.

Value stocks are basically companies that are trading at a discount to their intrinsic value. The idea is to buy these companies at a discounted level and then wait for the stock to eventually trade at its true fundamental value.

Key Characteristics of Value Stocks

- Lower priced than broader market. Value investing is based on the premise that market participants don’t always recognise the long-term potential of a company and hence do not pay a premium for them. However, over a period of time, value stocks trade at higher levels as investors will eventually recognise their true fundamental value.

- Priced below similar companies in industry. Many value investors believe that a majority of value stocks are created due to investors' overreacting to recent company problems, such as disappointing earnings, negative publicity or legal problems, all of which may raise doubts about the company's long-term prospects.

- Carry somewhat less risk than a broader market. Since these stocks are already trading below their fundamental value, they witness lesser price volatility than growth stocks.