Growth Vs Value stocks  – Differences

Investing in stock markets is like exploring an ocean of opportunities. However, choosing the right one requires careful analysis of the market and the company in question. Investors analyse the company based on various parameters and evaluate whether it can be a good action for their portfolio depending on factors like risk appetite and investment horizon. These factors also essentially classify stocks into two broad categories i.e., growth stocks and value stocks. Check out this blog to know the meaning of these types of stocks, their characteristics, and their differences to create your own investment portfolio. 

Read More: Growth funds – All you need to know 

What are growth stocks?

Growth stocks essentially are stocks of companies having huge growth potential in the future and higher growth in their revenues and earnings as compared to industry standards. These companies are typically aggressive in their growth model and prefer to re-invest their profits into the business to achieve the targeted growth. Such companies also have a unique business model or a niche product that is considered to be a market disruptor and invest heavily in research and development to increase their market share and profitability in the long run. 

Companies with huge growth potential often belong to the small-cap and mid-cap segments and offer huge potential for capital appreciation for investors. Growth stocks may not offer higher returns in the short term but are a good bet in the long-term portfolio. These stocks may be volatile and riskier in the short term but often have a business USP over their competitors driving a loyal customer base and fueling their growth plans. Growth stocks focus on innovation and often belong to companies in sectors that are expected to experience rapid growth, such as technology, healthcare, biotechnology, e-commerce, or renewable energy.

What are value stocks?

The simple definition or meaning of value stocks is stocks of companies that are undervalued in the market when compared to their intrinsic value. These companies are usually the opposite of growth stocks and are more stable with a history of good financial health. However, they can be undervalued due to a number of factors like economic conditions, market sentiment, or the cyclical nature of the industry, etc. The key characteristics of these stocks are the high potential for price appreciation in the long run, their regular dividend policy, and the reliability of the company despite difficult market cycles. 

Value stocks are considered to be less volatile and low-risk stocks offering more regular dividend payouts as compared to growth stocks and therefore are preferred by risk-averse investors. These companies are fundamentally strong and therefore are a good investment opportunity as they can offer higher returns in the event of a market correction.

What are the key differences between growth stocks and value stocks?

Some of the key differences between growth stocks and value stocks are mentioned hereunder. 

Category	Growth Stocks	Value Stocks
Meaning	Growth stocks belong to companies with a high growth potential and a business model or product that can provide potentially above-average returns for the company and the investors alike.	Value stocks, on the other hand, belong to companies that are currently trading at a price below their intrinsic value
Target investors	The target investors for growth stocks include investors with high risk-appetite and a long-term investment horizon	The target investors for value stocks include investors with lower risk appetites. The investment horizon for these investors can be long-term or short-term depending on the stock and the market correction opportunity.
Returns	Growth stocks offer the potential for higher returns in the long term.	Value stocks can offer lower returns as compared to growth stocks in the long term but also focus on providing moderate but consistent returns in the form of dividends.
Risk and volatility	These stocks are highly volatile to market fluctuations and are considered to be high-risk stocks	Value stocks are considered to be relatively low volatile stocks as compared to growth stocks and therefore carry lower risks.
Dividend policy	Growth stock companies prefer to re-invest their profits into the business to achieve their desired targets under the business plan rather than focus on distributing dividends to shareholders.	Value stock companies are known to provide more or less stable and consistent returns to their investors in the form of dividends even if the stock prices of the company do not see drastic growth.
Valuation	Growth stock companies often have higher valuations as compared to their current earnings or book value as they are focused on the potential for future growth.	Value stock companies usually have lower valuations as compared to their current earnings or book value which is a reflection of their being undervalued.
Capital appreciation	Growth stocks offer the potential for higher capital appreciation through increased stock prices over the long term	Value stocks may not offer significant capital appreciation as compared to growth stocks but offer more stable returns throughout the period of investment.
Nature of Company	Growth stocks are typically found in smaller, younger companies in high-growth sectors or those with disruptive business models.	Value stocks are often associated with well-established companies with stable earnings and financials in mature or out-of-favor industries.
Valuation ratios	The valuation ratios like the PE ratio and the PB ratio tend to be on the higher side as compared to the industry average and that of its peers.	The valuation ratios like the PE ratio and the PB ratio tend to be on the lower side as compared to the industry average and that of its peers.

Growth stocks or value stocks – Which one to choose?

Growth stocks and value stocks are diverse investment options catering to different categories of investors. While growth stocks are in the high-risk high return genre, they can be appealing to investors with a long-term investment horizon and the ability to take short-term volatility and market fluctuations. Growth investors focus on capital appreciation rather than a consistent flow of dividends. Value investors, on the other hand, can be risk-averse investors who may not be seeking huge capital appreciation but rather focus on capital protection as well as getting consistent returns during their investment horizon. Such investors aim to identify investment opportunities in the form of undervalued stocks having strong fundamentals and the potential to rectify their valuation in due time. 

Conclusion

A portfolio with a healthy combination of growth stocks and value stocks is ideal for investors as it allows them to benefit from the advantages of both types of stocks as well as balance out the risks of the same. Investors should, therefore, thoroughly evaluate the fundamentals of the stock before investing in the same as well as understand the correct entry and exit points of the market to maximise their returns from investment at minimal risks.

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