When looking at growth vs. value stocks, there are some factors to consider.
Do you want to play it safe, or are you willing to risk some money for a potentially larger profit?
Your next consideration should be how much money you have to invest. Budget investors will require a different approach as they have limited options.
Finally, you need some information about the stock you're looking into, as well as stocks in general.
Overview of Stocks
Stocks represent a small share of a company. Therefore, when you buy a company's stock you're really buying a portion of that company.
How much of the company one stock represents varies depending on the total number of stocks owned by all investors combined.
For example, if the total were 100, then 1 stock would equal a 1 percent share of the company.
However, that is never the case. Most likely you will have to own well over 10,000 stocks to own 1 percent.
The value of a company is equal to the number of stocks multiplied by their price. Simply comparing the price of two stocks is not enough to determine which company is worth more.
Stocks represent a win-win situation for both the company and the investor. The company can use the money to facilitate growth, while the investor benefits from that growth.
Benefits of a shareholder include:
A patient and wise investor can easily make 6 percent of their investments back in profit each year. By reinvesting that profit, your money will grow exponentially over time.
For example, someone who invests $1,000 a month for 10 years will likely make around $43,000 in interest during that time. But after 20 years, they'll make over $215,000.
Because there is a degree of unpredictably when dealing with stocks, it is possible to actually lose money over time. However, you can mitigate the risk by investing in a wide range of companies to create a diverse portfolio.
Types of stocks
Stocks are influenced by a number of factors. Particularly, how investors perceive a company can affect the value of its stocks more than the actual stability of the company.
If a company is predicted to do well, more people will buy their stocks, which will drive up their value. Conversely, companies that are expected to do poorly will have a lower stock value.
In order to categorize different stocks, investors have come up with names for describing the way the stocks behave.
Income stocks are from companies that pay dividends on a regular basis. Investors buy them for the income they generate.
These stocks are typically less volatile, meaning their value stays relatively consistent. The dividends the company pays per share is higher than non-income stocks.
While these stocks do not give the greatest returns, they are a safe way of ensuring profit.
Blue-chip stocks describe those from large, well-established corporations that have a long history of growth.
Like income stocks, they're not very volatile and therefore are a relatively safe investment.
However, they do not grow as fast as some other types of stocks.
Growth stocks grow at a faster rate than the market average, meaning they have a higher potential for profit.
Companies with growth stocks rarely pay dividends because there is no shortage of investors without them. People buy these stocks in the hopes of selling them for a large profit.
Instead of paying dividends, the company will reinvest all of their profits into growing the company.
Growth stocks are often tech start-up companies that hold unique product lines, resulting in a lack of competition from other companies.
These types of companies usually have a loyal customer base, and/or a high percentage of market share in their industry.
For example, the price of a stock may drop when a company loses favor with investors. At the point when the price drops lower than the actual value of the stock, it becomes a value stock.
Many variables affect whether or not a stock is a value. If the company offers exceptionally high dividends, that can be the deciding factor.
The money earned just from holding the stocks could be enough to make buying the stock worth it. In such a case, the stock is considered both an income and value stock.
Value stocks often have prices that are significantly lower than the industry average. In these situations, the price of the stock will likely want to gravitate back towards where it should be.
Growth vs. Value Stocks
An important thing to remember with growth vs. value stocks is investors consider both to be riskier than income or blue-chip. However, the potential rewards are greater.
While growth stocks are predicted to increase in value, timing is key.
Because of the expected growth, investors flock towards growth stocks, driving up the price.
If you enter the game early enough and buy before the price inflates, this is great. You could turn a significant profit.
However, there is always the chance the stock will rise too high and start to fall. The stock may lose favor or another company that offers similar products could steal the spotlight.
Value stocks are different. Generally speaking, they have dropped to a point where they've become a bargain.
Because of this, value stocks are unlikely to fall much further and could be preparing for a turnaround.
Value stocks that are income stocks are also less risky because they consistently pay dividends, so you're likely to receive profit even if they don't grow.
Finally, value stocks are more accessible to budget investors because they are a bargain.
Growth vs. Value Stocks: The Best Choice
When looking at growth vs. value stocks, there is no all-encompassing best option.
In principle, however, purchasing something that is undervalued is better than buying something overvalued and inflated.
Growth stocks can lead to a huge profit if your timing is right or easily become your enemy if you buy them too late.
Value stocks are safer because by definition they are worth more than they cost. The risk is in determining whether they are actually values.
What do you think about growth vs. value stocks? Which one works for you?
Let us know in the comments below!