How To Tell A Growth Stock From A Value Stock

The stock market universe is vast: By some estimates, there are approximately 630,000 publicly traded companies around the world, with 6,000 listed on US exchanges alone. While there are numerous ways investors classify stocks to suit investment strategies, two of the most common are growth stocks and value stocks.

Growth Stocks: A growth stock refers to a company whose revenues and earnings are increasing, or expected to increase, at a faster rate than average. As a result, their share price should theoretically appreciate more rapidly than the stock market overall.

They’re most commonly found in newer, non-traditional fields, emerging sectors and businesses characterized by innovation: high-technology, alternative energy, medical/biotech. Growth stocks often represent small and mid-sized companies but they can be big, household names, too. Amazon AMZN, Alphabet (Google’s parent) GOOGL, and Netflix NFLX are still considered growth stocks as they evolve and enter new markets.

They generally have higher price-to-earnings (P/E) ratios versus the benchmark indexes like the S&P 500 or the Dow-Jones Industrial Average. And they usually don’t pay dividends, because either they have no excess profits to distribute, or they prefer to plow profits back into the company.

Growth stocks are often considered higher-risk. It’s largely their potential that’s fueling many younger firms’ rise. Shares could tumble dramatically if corporate earnings don’t live up to their promise. Investors in these equities should have a long-term time horizon to weather performance bumps and industry changes.

Value Stocks: If a growth stock is the belle of the equities ball, a value stock is the wallflower. It’s a fundamentally sound, solidly performing company that for some reason is being overlooked or undervalued by investors. Its share price and P/E ratio tend to be lower compared to the overall market or its sector averages, and to what its dividends, sales, or earnings may otherwise warrant.

Value-stock investors are bargain hunters. They see a chance to buy a valuable company at a discount, like art at an auction. Eventually, if the market realizes the company’s intrinsic value, the stock may rise again, offering a superior return to those who snapped it up at lower prices. Benjamin Graham is one of the best-known proponents of value investing.

Value stocks can be in any industry, but they tend to be larger, well-established companies, unlike the upstart growth stocks. In contrast to growth investors, value investors are somewhat contrarian, ignoring trends and waiting for a company to be rediscovered.

Value stocks are considered safer on the risk spectrum, though not without risk. The shares may never recover from whatever is depressing them, or they might take years to do so. So, value investors need patience to realize gains. However, they often get an immediate return in the shape of income, as value stocks often pay strong dividends.

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