Growth V/s Value Investing: Which One To Choose?
February 7th, 2024 General Blog
Investors have a wide range of options to choose from when it comes to making investments, such as debt v/s equity, active v/s passive funds, mutual funds v/s stocks, value v/s growth investing, etc. While investing in the stock market, growth and value investing are two investment strategies that investors can choose from.
Both the approaches serve different purposes and are widely popular and adopted by investors to boost their wealth in the stock market.
Fundamental research helps to distinguish between value v/s growth stocks. Let us study each approach in detail before telling the differences between them.
WHAT IS GROWTH INVESTING?
The Growth Investing approach represents companies with higher potential to outperform earning and are expected to continue delivering high returns of profit growth. Growth stocks are found in small-cap, mid-cap, and large-cap funds. Investors are willing to invest and pay a higher price in anticipation of higher growth or return in the near future.
Investors are optimistic about its business strategy and its prospects for development in the foreseeable future. Several factors may inspire investor confidence, including the company's competitive position or the expectation of positive reception to the company's following product line.
Furthermore, their higher price-to-earnings ratio makes these stocks more 'expensive' than their rivals. That is the reason why investors are willing to pay a higher price for these equities than they are now earning because they believe future earnings will justify the price.
WHAT IS VALUE INVESTING?
The value investing approach usually picks out undervalued stocks or those whose current market price is less than their inherent worth. Hence, they progress slowly, but they do have higher underlying worth. The notion is that the market will quickly perceive the value, and the share price would 'catch up,' resulting in significant returns. So, for example, if the stock's actual value is Rs. 30/- per share but it is trading at Rs. 25/- at the moment, the analyst will consider this to be a good value pay.
Value stocks can be undervalued for many reasons, such as economic conditions, legal problems, negative publicity, disappointing earnings, etc. All of these reasons raise doubt about the company's long-term prospects. However, they bounce back slowly, and such value stocks are most suitable for long-term investors and may carry more risk of price fluctuations than growth stocks.
There has been a constant battle between value v/s growth investing that has been going on for years, and both approaches have suitable arguments to back them up. Some of the fundamental differences are that the key assumption about growth stocks is that the above-average performance will continue in the future. This is because companies that outperform their peers may be new or belong to an emerging sector that can become an industry leader in the future.
On the other hand, the value investing approach has a different perspective. Instead of focusing on record-breaking numbers, value investors choose companies that belong to mature sectors and have predictable revenues.
Another difference between value stocks v/s growth stocks is that when the interest rate decreases and corporate earnings rise, they stand a higher chance of outperforming their peers. However, it will be the first to be penalized when the economy slows down. Whereas value stocks may perform well in an early economic recovery but are more likely to underperform in the long-term bull market as continuous media coverage, a rumor, or a news story of the company's management may come out and create a panic sell-off.
