Have you ever heard of ‘Growth Stocks’ vs ‘Value Stocks’? What exactly are they? Which one is better to invest in?
Growth stocks usually refer to companies that are considered to have the potential to outperform the general market due to their future “growth” potential. These companies offer one-of-a-kind products or develop disruptive technologies. The price of growth stocks is usually volatile, and they usually have a higher P/E ratio (price to earning ratio) hence overvalued. Investors buy growth stocks for their price appreciation, and growth stocks companies typically do not pay dividends. Most growth stocks companies are in the technology sector but this is not necessarily always true.
Value stocks usually refer to companies that are trading below their real value and are considered a “value” buy. These are usually more established companies in established industries. The price of value stocks is usually more stable and the P/E ratio tends to be lower and hence undervalued. Value stocks companies tend to pay dividends. Investors collect dividend income from holding value stocks. Most of the value stocks are in established sectors such as food, finance, and energy, but this is also not always true. In addition, it’s important to note an overvalued growth stock will not be forever growth stock, it’s very possible when its business gets more mature, its growth slows down and eventually, it becomes an undervalued value stock.
Which One to Choose?
Studies have shown mixed results on long-term returns between growth and value stocks. In certain decades value outperformed growth, and in other decades vice versa. If you are going after price appreciation, growth stocks might be better for you; if you are simply collecting dividends, please consider value stocks. However, the best approach is still to own a diversified portfolio including both growth and value stocks so you never miss out on any good companies!
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