If you’re just dipping your toes into the world of investing, you might have heard the terms “value stock” and “growth stock” going around.
The two core styles of stock investing help investors differentiate between an investment’s potential.
But although the terms are pretty self-explanatory—a growth stock is a company that is set for high growth, and a value stock is one that’s cheap—it’s worth knowing a few things about these core investing styles before you decide which one is best for your portfolio.
Both options have their individual pros and cons but suit different investing needs. Is one better than the other, though? Let’s take a look.What are growth stocks?
Investors who are looking for a growth company are looking for early investment opportunities and those with strong growth potential.
Growth companies are up-and-coming, often smaller in size, and poised to quickly become leaders in their industry. Since they usually will be in their early developmental stages, profitability might still be a little way off, giving investors a prime time to get in early.
These types of stocks are easy to get excited about, but it’s worth knowing a bit more about them because you go investing all your hard-earned cash.
Firstly, since growth companies are usually low on cash, as an investor, it’s unlikely you’ll be receiving dividends. They can also be highly volatile since they’re likely to undergo a lot of big changes, which can impact the stock price drastically.
Secondly, it’s also important with growth stocks that investors aren’t expecting rapid returns and can wait out the investment, as many growth companies can take their time before they flourish.What are value stocks?
While growth stocks are all about the next big company to blow up, value stocks are companies trading at a cheap valuation.
But a value stock doesn’t only earn its term by being cheap, it’s also key that the company is undervalued, by having solid earnings and a potential to grow.
Value companies are ones with steady and stable increases in revenue and earnings—they’re essentially your less-exciting but more stable investment choice. A value stock can be dropping in price, but as long as there’s potential for growth in the future, it’s still a good investment.
If you’re someone who is more interested in dividends, value stocks are a great option. This is because value stocks don’t have the hype that growth stocks do, so they often compensate by having alluring dividend yield for investors.
Value stocks are also usually much less volatile than growth stocks, with more predictable and steady stock prices. That said, with plenty of stocks out there poised as value stocks, investors should be aware that many stocks will be cheap, but lack solid business prospects or growth potential, making them a poor investment choice.
Another benefit of investing in value stocks, is, unlike growth stocks, value stocks can often turn a profit more quickly if a company’s business starts doing well all of a sudden.Is one better than the other?
Now that you know the difference between a value and a growth stock, you might have an idea of which one better suits your investment needs and priorities.
As you can probably tell, both have their upsides and downsides depending on what you’re looking for in an investment and how quickly you want to make money.
While categorizing all stocks as either “growth” or “value” would be ideal, stocks often have the potential for both traits. It’s also worth noting that growth stocks usually will perform better when the economy is doing well, while value stocks can be preferable when the economy is less stable.
If you’re not set on one or the other, having a bit of both in your portfolio can be a great idea, as each has its own benefits. The only way to tell which one you like better is to start investing and see for yourself.