For many investors, the difference between investing in growth stocks and investing in value may be confusing at first, but there are clear distinguishing features that help us distinguish them.
The main difference between the two styles is related to the type of company, its profit, growth expectations and other financial parameters used for evaluation. This type of information gives investors an important idea of whether a stock is overvalued or undervalued and its possible future performance.
Growth: Profits are expected to grow faster than the average for the industry or the market as a whole.
Value: Lower than average price / book value or price / return ratio and / or high dividend income.
There are two main parameters that consumers could use to determine the type of stock they own: the Price / Earnings per share (P / E) ratio and the Price / Book Value (P / B). These ratios help to assess whether a stock is undervalued or overvalued – cheap versus expensive. The higher the P / E and P / B ratios compared to other stocks, the more growth-oriented the stock is, and the lower the P / E and P / B, the more oriented to value is the share.
In contrast to growth investments, value-seeking investors choose stocks with lower than average P / E or E / P ratios and / or high dividend yields.
Investors looking for value buy stocks because they are undervalued or cost more than the price at which they are currently being sold.
To determine if a stock is undervalued, investors look at the fundamental characteristics of a company, which include the P / E and P / B ratios, as well as the company’s management, its health, and current and future cash flows.
Many advisors encourage investors to use both strategies to better diversify their portfolios.