Value Stocks vs. Growth Stocks: Which One is Right for You?
When it comes to investing and creating your portfolio it is best to have a risk tolerance assessment done. This is for the purpose creating a proper asset allocation investment strategy.
Included in this portfolio may be value and growth stocks. So for this article, I will discuss both and let you decide.
Let’s all agree that the purpose of an investment portfolio is to grow your wealth, not lose it. So any knowledge is welcome knowledge.
When it comes to investing in common stock, the growth comes from either dividend paid or the price per share of the stock. From the time an investor purchases the shares to the time they sell them.
It is that simple, so do not make it more complicated than that. The question here would be the type of company’s stock and how they are expected to perform that needs to be answered.
A working definition of a value stock is any company whose price per share is undervalued in the market compared to similar companies in the same asset class.
Another definition is that the price per share is trading below its target value. This is based on a few factors such as its financial status among its peers. Other indicators are low financial ratios like price to book or price to earnings ratios.
Of course, value stocks may or may not be paying dividends. A value stock paying dividends is an added bonus if the stock price per share goes up after you own it.
The determination of a particular stock as a value stock is somewhat subjective in the short term. It could be simply that it is undervalued based on news about the company that may or may not be true.
This news could be a rumor or even current state of affairs about the management. Over the long term, these rumors and news will pass and the smart investor knows that.
A value stock is typically a more established company that has good potential as a long-term value company. Their stock price will increase to their previous levels or even higher.
It takes some time to do the research and a value company will always be a value company in the eyes of the investor who buys it. Go to Yahoo.com and check out their finance page to start your stock research.
A growth stock company is a company that has strong indications of significantly growing its business and market share.
It does not mean it is an undervalued stock as it may currently be priced in the market correctly. However, a growth company is in any industry whose growth appears to be faster than the market in general.
They tend not to pay dividends due to the fact that they focus most of their earnings revenue toward further research, development, and expansion.
It can be stated that every asset class has their own growth companies; however, they tend to be in the technology arena, including alternative energy and biotechnology which includes medical instrumentation.
Growth stocks are typically companies that are relatively newer than the companies within their asset class. They tend to be companies with products that are more innovative. They usually hold the promise for major impact in the future markets they serve.
If a growth company is an older company then it can be stated that they are companies with great leadership. They have great products and a high demand for their product or service.
Aside from the older more established companies, growth stocks tend to be small companies, less stable and therefore riskier. The tradeoff, of course, is a substantial return on capital. Hence the meaning of the term growth stock.
So which one is right for you? How about having both value stocks and growth in your portfolio? Do your research and happy investing.