Main Differences Between Value Investing And Growth Investing
There are risky alternative investments, such as hedge funds that use market opportunities to their advantage. Quantitative hedge fund strategies use quantitative analysis for investment decision-making. These hedge funds usually leverage the latest technology and machine learning techniques to make trading decisions automatically.
When it comes to investing in the stock market, value and growth investing are the two most common approaches. It’s not necessary to choose one over the other, as each method tends to have its own loyal follower base. Investors in growth stocks search for companies that show constant earnings growth while value investors look for stocks that seem to be undervalued.
Let’s take a closer look at these two stock investment strategies to see what the main differences between them are.
What Is Value Investing?
Value investing involves investing in undervalued companies. These are usually progressing slowly compared to others on the market. They are underrated, however, they have a strong underlying value. The main idea here is that later the market will recognize the company’s value, and the share price will rise, generating substantial results.
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Stocks of these underrated companies have a lower price-to-earnings ratio of value stocks compared to other companies, but still, they have a strong track record. Also, value stocks have lower price volatility during the market lows and highs.
Among America’s most famous investors, there are many value investors, including Warren Buffet.
What Are The Key Characteristics Of Value Stocks?
Managers at value funds are looking for companies that have good fundamentals but are still considered to be out of favor. Stocks of the newly launched companies that have not been recognized by investors are also considered to be value stocks. Among these features, the key characteristics of value funds include:
- Value stocks have lower prices compared to the broader market. The main goal of value investing is investing in lower-priced stocks of good companies that will eventually grow in value when other investors recognize these stocks.
- Value stocks are priced lower compared to companies in the same industry. Value investors usually think that a majority of value stocks are created due to investors' overreaction. This happens when a company faces some problems, including lower earnings than expected, negative publicity, or legal problems. All these challenges may raise some doubts in investors about the company's prospects.
- Value stocks carry less risk than the broader market. Value stocks can be more suitable for long-term investors, as they take time to turn around. These may also be riskier in terms of price fluctuation compared to growth stocks.
What Is Growth Investing?
Growth investing is about finding companies that have an ‘above average’ growth rate. As they show continuous growth in revenues, profits, they outpace their competitors with more innovative services and products.
With a good earnings record, growth stocks are expected to continue growing. They are expected to outperform the overall market over time due to their huge potential. This growth rate is extremely important for attracting potential investors.
Growth stocks are also priced differently because of the higher price-to-earnings ratio. That’s why investors are willing to pay more for these stocks relative to current earnings, as they believe in future earnings that will justify the current price.
What Are The Key Characteristics Of Growth Stocks?
The main indicator of growth stocks is an above-average earning growth. Growth stocks have higher volatility, so they carry more risks. Companies, which showed above-average earnings in recent years are expected to continue delivering more profit growth further. However, there is no guarantee that it’s going to be that way.
Usually growth investors favor smaller and younger companies, which demonstrate potential to achieve high earnings and increase profitability in the future. The key characteristics of growth stocks are the following:
- Growth stocks are priced much higher than the broader market. Investors pay a lot more for growth stocks compared to value stocks, as they expect to sell growth stocks at even higher prices as the companies grow more.
- Growth companies have high earnings records. Growth companies may still thrive during slower economic improvement, showing their growing earnings regardless of economic conditions.
- These stocks are more volatile than the broader market. Growth stock price can rapidly drop, as it relies on publicity around the company. So any negative news about the company may result in a price fall.
Conclusion
Generally, growth stocks have the potential to perform better when company earnings are rising. But it’s worth noting that the prices of those stocks may also be the first to fall when there’s any problem where the company is involved. Value stocks may do well early in an economic recovery and theoretically provide a superior return. However, they are typically most likely to lag in a market. That’s why many investors choose to combine growth and value stocks to have higher returns with less risk.
