Growth Stock vs Value Stock

Difference Between Growth Stock vs Value Stock

Investors buying stocks in equity markets could gain in two ways: one is capital appreciation through stock price appreciation and second through income via dividend receipts. Some stocks may fulfill both Growth Stock vs Value Stock criteria while most satisfy either of the two. Based on their perception and preference for risk-return balance, investors may choose stocks on a value, growth or income perspective. let us study Growth Stock vs Value Stock in detailed in this post.

Growth stocks are perceived to have substantial growth potential in the near future. This perception is usually held since these companies have consistently exhibited better than average earnings growth records compared to the broad market or respective industry. These stocks are judged as high-quality stocks or successful companies with distinguishing future prospects. Most of these growth companies pay little or no dividends since plowing back the profits for further business expansion is considered a more feasible and lucrative opportunity.

Distinguishing future prospects could be innovative products/services, a continuous stream of innovative ideas that keep getting transformed at a fast pace, good business models or simply good management. Most of the growth companies are new companies that are capitalizing on their innovative ideas. While growth stocks offer high returns on capital, chances of price declines are also high especially in case of small unstable companies.

Value stocks are perceived to be currently undervalued compared to their intrinsic value or in other words fundamental worth. The respective companies are fundamentally sound but for some temporary reason, they are currently considered less favorable investments by most market participants. Some examples of reasons could be legal problems, negative publicity or disappointing earnings in the short-term or other more specific issues not connected with the company’s operations. Investors aim to bank on these stocks by buying at low bargain prices and selling when the market realizes the full potential of the respective companies.

The intrinsic value of a stock is a subjective concept and can vary based on the varying assumptions made by the investor. Value group usually consist of comparatively larger and well-established companies with financially strong fundamentals and hence are less risky than the growth stocks. However, within the value group, stocks of new companies could also be there whose potential has not been fully recognized by broader market participants.

Risk-averse investors may also go for income stocks which are fairly stable and offer competitive dividends like common stock of utility companies or preferred stock promising fixed dividends.

Growth Stock vs Value Stock Infographics

Below is the top 6 difference between Growth Stock vs Value Stock

Key difference between Growth Stock vs Value Stock

As you can see there is much difference between Growth Stock vs Value Stock. Let’s look at the top differences between Growth Stock vs Value Stock –

• Growth stocks are perceived by the investor as associated with high growth companies with distinguishing future prospects that are expected to help in faster revenue/earnings growth compared to market/industry. Value stocks are perceived by an investor as associated with fundamentally sound companies but currently undervalued in the stock market due to short-term unfavorable reasons
• Growth stocks are usually more expensive with high P/E or P/B ratios as broad market participants expect these companies to have good growth prospects while value stocks are less expensive with low P/E or P/B ratios as market participants differ in their view of future growth prospects of the company vis-à-vis the investor.
• Growth investing has higher upside potential based on the premise that the growth companies continue to surprise the markets with their innovations or business models. Value investing has limited upside potential since the market will eventually recognize the full potential of the companies and price the stocks correctly.
• Growth stocks are more volatile and sometimes expensive compared to company fundamentals while value stocks are less risky owing to limited downside potential
• Return from growth stocks is contingent on a realization of investor’s perception of earnings growth prospects while returns from value stocks are contingent on recognition of investor’s value perception by the market

Head To Head Comparison Between Growth Stock vs Value Stock

Below is the topmost comparison between Growth Stock vs Value Stock

Conclusion

Stocks can provide returns through future growth, current undervaluation in a market or dividend income. Accordingly, we witness various styles of investing viz. growth, value and income investing.

Growth stocks are associated with companies witnessing high earnings growth records and are assumed to generate high growth in the future. This definition mostly fits small companies in their growth phase. Of course, you have more established companies as well which may continue to earn high growth due to their innovative capability and strong business models like Amazon. Growth stocks hardly pay any dividends since they consider it more prudent to reinvest the earnings

In contrast, value stocks are currently undervalued in the market. This mostly fits fundamentally sound companies with a competitive edge difficult to overcome by peers but are currently unpopular in the market on account of short-term unfavorable events. Value investors may look for stocks which are trading at historically low levels or attractive discounts compared to peers based on P/E or P/B levels etc.

Combining growth and value approaches for long-term investment helps to balance risk and return. This blended approach provides the potential for capital appreciation throughout the economic cycle wherein market and economic situations provide opportunities for both types of investment growth. I hope now you must have got a fairer idea of both Growth Stock vs Value Stock. Stay tuned to our blog for more articles like these.

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