Wednesday, December 19

Growth Stock vs Value Stock

Growth Investing vs Value Investing
There are a myriad different ways to assess and select stocks and other investment opportunities, two most important strategies are Growth and Value Investing.

Growth Investing
Growth investing involves picking and investing in stocks that have good growth potential. Usually a growth stock is one whose revenues, cash flows and earnings (profits) are expected to grow at a rate which is higher than the industry or overall market. Growth stocks usually do not pay dividends and concentrate on reinvesting the profits as they expect to generate higher returns.

Growth stock investing typically does not put much stress on valuation measures, but on the recent and expected growth in revenue, margins, profits and cash flow.  Parameters such as P/E, P/BV, P/NAV and so on are not of great importance to the investors. It’s the growth rates that are important.

The risk of this type of investing is that stocks can be overvalued and the investor may end up paying a high price. Another risk is that the projected growth may eventually slow or even collapse.

Value Investing
Value Investing involves selecting stocks that trade for less than their intrinsic values / fundamental values (based on Dividend, Net profits, sales etc). Value stock investors like to buy a good business at highly attractive price.  

The share price in relation to the intrinsic value of the company is the key. The intrinsic value could either be as a going concern, or broken up or liquidated. In either case, the investor is either depending on a catalyst, some internal or external agent or force to cause the company to generate more profits or cash, or for other investors to recognise the value also, and bid up the price of the company.

Features of Value Stocks include High Dividend Yield, Low P/BV Ratio, Low P/E Ratio

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