- 5 min read•
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- Updated 01 Dec 2023
Key Highlights
- Share prices of growth stocks rise rapidly, presenting high profits. Stocks with valuable features can increase in value over time.
- Growth stocks are prone to volatility. Investing in value has a lower risk than investing in growth.
- Since growth stocks prefer to invest their profits in expansion, they don't pay dividends. The dividends on value stocks are higher.
- When economic conditions are good, growth stocks tend to outperform value stocks. In difficult economic times, value stocks tend to perform better.
What are Growth Stocks?
A growing stock's share price rises rapidly, presenting high profit potential. Growth stocks usually outperform their peers and the industry, which is reflected in their premium valuations in the market. Growth stocks don't pay dividends because they prefer to invest their profits in expanding. A growth stock company is usually new and not very established. They're trying to gain as much market share as possible, which they believe is only possible by expanding.
Characteristics of Growth Stocks
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Priced Higher than the Broader Market A higher price-to-earnings ratio is acceptable to investors since they expect higher returns.
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Higher Growth Record When market levels rise, these companies perform better than average.
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Market Volatility is Higher than the Broader Market Volatility is a risk associated with growth stocks. A negative announcement about the company or its sector can lead to a sharp drop in its price.
What are Value Stocks?
A value stock is one with a unique feature that can create value over time. According to analysts, value stocks are those that trade below their fair market value and are owned by large, well-established companies.
As an example, a company's stock may be trading at Rs 250 at the moment. However, analysts may feel that after finding the fair book value (outstanding shares divided by the company's capitalization), the stock is worth Rs 350. If you believe that a stock will reach its fair book value sooner rather than later, you can invest in these stocks. The share prices of value stocks don't rise by a large margin, but they do offer regular dividends to their shareholders.
Characteristics of Value Stocks
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Undervalued than the Broader Market When investors come to recognize the true value of a company's stock, value investors invest in undervalued stocks.
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Priced Lower than Peers The stocks have fallen out of favor as a result of an overreaction by investors to negative news about the company, such as lower profits, management changes, or legal issues that cast doubt on the company's long-term prospects.
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Carry Less Risk than Broader Market Value stocks take longer to turn around, and they're less volatile. Therefore, these stocks are good for long-term investors.
Difference Between Growth Stocks vs Value Stocks
This comparison between growth stocks vs value stocks can assist you in identifying growth and value stocks.
Meaning | In growth stocks, investors invest in companies with a faster expansion rate than others. Because of this, investors expect a higher return. | Value stocks are from companies with strong fundamentals that sell below their fair price in the market currently. Value investors seek undervalued stocks that are currently selling below their fair price in the market. |
Approach | Investors purchase stocks of new companies with the potential to grow faster at higher prices. | A value stock is typically a share of a well-established company with a track record of success. |
Focus | The potential for rapid growth of a new company | A company is trading below its market average. |
Risk | Volatility is a characteristic of growth stocks. In a growing economy, these stocks usually perform better. During a slow economy, their values can be negative. | The risk of value investing is usually lower than that of growth investing. |
Expense | A growth stock's price is higher than its profit. Therefore, growth investment is expensive. | The price of value stocks is comparatively lower than that of growth stocks. |
Investment Horizon | Typically done over a long period of time. | In value investing, the investment horizon is typically short. |
Dividends | Growth stocks typically do not pay dividends. | Dividends on value stocks are usually higher than those on growth stocks. |
Stock movements | It is common for stock prices to move dramatically and frequently. | The price volatility of value stocks is lower, and they are more stable. |
P/E ratio | Higher for growth stocks | P/E ratios of value stocks are low. |
P/B Ratio | High | Low |
Value Stocks versus Growth Stocks: Which is Better?
Stock market journeys are unique to each investor. A variety of factors must be considered, including their risk appetite, financial objectives, and time horizon. Therefore, there is no universal right or wrong approach.
Young investors with long investment horizons and higher risk appetites might find growth stocks with higher earning potential attractive. However, most investors will create a portfolio that combines both growth stocks and value stocks. The portfolios they put together are usually flexible and generate reasonable earnings with significant growth potential.
Conclusion
Growth versus value stocks is often argued by investors, but over the long run, neither strategy has outperformed the other. Furthermore, investors should choose stocks based on their knowledge of the market. You can seek expert guidance from Kotak Securities if you need assistance with stock market knowledge. And for better risk-adjusted returns, you should create a diversified portfolio that combines both styles of investment in order to avoid high risk.
