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Difference Between Value Investing VS Growth Investing

What is the difference between value investing and growth investing?

By Arsalan HaroonPublished 2 years ago 9 min read
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Difference Between Value Investing VS Growth Investing
Photo by Aidan Hancock on Unsplash

Knowing the difference between value investing VS growth investing is crucial.

When investing in the stock market, you have to choose what type of strategy is suitable for you based on your risk tolerance.

When you know what value investing VS growth investing is and what characteristics each has, You will better understand if you want to buy value stock VS growth stock.

So let's start with what is value investing VS growth investing?

What are value investing and growth investing?

Value investing defined

When you buy a stock that is down by the market below its worth, You expect that value stock to increase to the price of what it is worth or more. It is value investing.

Sometimes stock prices go below the stock price of what a company is worth because of some recent bad news or government policy that affects the company.

Most people sell the stock more and drive the company stock price below its worth. That is a time for a value investor to look at a company fundamentally and analyze it to determine its value.

If a stock price is below what the company is worth, then value investors will buy that stock because, in the long run, a company stock price below what it is worth will go up to the company's actual value.

Growth investing defined

It is a strategy where you buy a small or mid-cap company that is growing or expected to grow above-average rate compared to their industry, sector, or the overall market.

Growth investors don't want dividends. Growth investors want companies to retain earnings and grow the business, which increases their stock price.

Growth investors make money through capital appreciation. Growth investing is usually high risk and high reward.

Differences between value investing VS growth investing

Unlike value investors, growth investors don't worry much about whether a stock is undervalued or not. Because growth stocks ( small and mid-cap companies) typically are overvalued because they have so much potential in the future.

Growth investors think that paying more for a stock is not a big deal if companies' earnings grow significantly, which increases the stock price.

Unlike growth investing, Value investors want reasonable business at a cheap price.

Growth investors want a good company with exponential growth at a higher price than what the company is currently worth.

A growth investor cares about if a company is growing faster than its sector or industry.

Growth investors want companies to invest all the money into growing their company at an above-average rate. Growth investors care about the growth of the company.

If the company's earnings grow faster, it increases its stock price. Growth investors take more risk than value investors and make more money than value investors.

Value investors only buy companies that are trading below the price of what it is worth.

A value investor typically buys large-cap companies which don't have much growth left, but their stock price is down more than what they are worth. So they buy the company's stock and expect the stock price to rise to the value of what the company is worth.

Value investors take less risk because they only invest in a company with an undervalued stock price. They invest in a company where the market took its stock price below its value. So it is more likely that the company stock will go up to its worth rather than down.

Both values investing VS growth investing have differences. But knowing what investment strategy is right for you is crucial to building wealth in the stock market.

Investing as a growth investor

Most people want to invest in the next Google or next Amazon. But most people fail to do growth investing because of the future's uncertainty and so many risks associated with small-and mid-cap companies that you will likely not get the growth you anticipate.

But it doesn't mean that every growth investor fails in every investment they make. Instead, they may lose money on some investments. But when they get one successful investment. It covers all the money they lose on other investments.

Growth investors think it is worth the price to take more risks to get higher rewards in the future. A growth investor believes that you don't have to be right all the time. Instead, you have to be right a few times, Which can make you a lot of money.

Some of the key things to know as a growth investor are.

Although these are not the only thing to look for when investing in growth stocks, these are some key things you should know before doing growth investing.

  • Select companies with the above-average growth rate in the sector or industry, If a company is growing more than its sector or industry. Then they are more likely to be a growth stock.
  • Sell a winning stock when you see it doesn't have much potential for growth in the future.
  • When you do growth investing, be patient because sometimes a company won't grow some quarter, and suddenly you will see incredible growth in the next quarter. So be patient in growth investing, and you will more likely see your growth stocks making you money in the long term.
  • Don't stay invested in a stock that is a loser and doesn't seem to have much growth in the future. Most people get too patient, which results in them not selling their losses which won't recover in the future. You have to accept your failure and learn from it. Then move on to other growth stocks that provide growth in the future.

Investing as a value investor

Value investing has been a very profitable strategy for investors. But value investing sometimes doesn't provide as much capital appreciation as growth investing because you invest only in stocks undervalued by some small percent of what the company is worth. When the stock rises to some percent to the value of what the company is worth. It doesn't tenfold your money as growth investing can.

Value investing is less risky than growth investing. There is a higher likelihood that investors make money doing value investing because when you invest in a company that is too undervalued by the market. If you analyze that company and it is in a healthy financial position. Then its stock price likely will go up in value in the future.

Some of the key things to know as a value investor

  • Look at a price-to-earnings ratio and price to book ratio to get an understanding of how expensive the stock is.
  • Price to Earning ( P/E ratio): the ratio of a company's share price to its earnings per share

    Price to Book ( P/B ratio): the ratio of a company's share price to its book value( asset - liabilities).

    If the P/E ratio is 20, the market is willing to spend 20 dollars for every dollar it gets from the company. Usually, the lower the p/e ratio, the more stock is undervalued.

    You have to buy companies with a maximum of 20 P/E ratios. You have to look at this P/E ratio closely because it is one of the quick indicators to identify undervalued stock.

    But you also need to learn about what the company is doing and if it is financially well or not, then consider buying the company.

    So don't just rely on the P/E ratio and buy stock. It is a big mistake most beginners make. You should look at the company's financial situation and then identify if they are healthy or not.

    If companies are financially healthy, their undervalued stock will go to what they are worth. If they are not in good condition, the stock price won't rise.

    The P/B ratio is another tool to identify undervalued stocks. A company's P/B ratio of less than 1 is considered undervalued stock, and you should go further into the company to know if they are truly undervalued or not.

    You still have to learn about a company. Read its annual report and financial reports. If the company is in good condition, its stock price will rise.

    The more expensive the stock price is, the more likely it may go down in value. You have to find the stock undervalued by the market so you can take less risk but make a profit on your investment. You have to also look at whether it is a good company so it can rise in value or not.

    Sometimes companies are not performing well, so their stock price goes down in value to what they are worth. So you should read about a company as much as possible to understand if the company is in good condition or not. By doing that, You will increase your understanding of whether the company is a good buy or not.

    Make sure you do your homework before you make any investment decision.

    • Buy good companies at low prices to get a good return in the future.

    You should not only look at whether a company is undervalued or not. But also if it is a good business or not, If it is a good business and trading at a bargain price. Then, it is an opportunity for you to buy a terrific company with a low stock price, which rises in the future.

    Ratios only tell half of the story. You want to get a clear understanding of the company before you invest in it. You have to read everything about a company to understand whether the company is in good financial shape.

    Should you be a growth investor VS a value investor?

    It is a question that you have to answer by yourself because only you know what risk tolerance you have and how much risk you can take to get higher returns.

    If you are willing to take a high risk to get high rewards, growth investing is the best strategy. But when people take high risks, they usually can't control their emotions. You have to control your emotion. It can ruin a smart investor.

    If you are someone who dont wants to take a lot of risks, But is still willing to take some risks to get good average or sometimes above-average returns. Then value investing might be a good strategy.

    There is no clear-cut answer about what investment strategy is superior to other strategies. It might be that some people will do value investing, and some people will prefer growth investing for high risk and high reward.

    Ultimately you have to decide how much risk you are comfortable taking and what strategy might be right for your investment.

    Conclusion

    The crucial thing to know is that there are no strict rules that you should only follow one investment strategy and forget others.

    You can combine value investing principles with growth investing and take advantage of both methods to increase your returns. You may find an undervalued company stock price with the company growing fast. Sometimes this is also an attractive strategy to combine both investment strategies to get good returns.

    Continue Reading:

    Things You Must Know Before Investing In The Stock Market

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    About the Creator

    Arsalan Haroon

    Writer┃SEO Expert┃Investor

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