When to Utilize Value vs. Growth Investing
Value vs. growth investing both involve looking for stocks that are priced below the likely strength of the underlying company with the goal of capturing the asset’s eventual gains. But the key difference between value vs. growth investing is that value investing is a long-term strategy, while growth investing is a short-term strategy. A value strategy is for building wealth over a period of years and maintaining that wealth through stable assets. A growth strategy is for building wealth over a period of months, at the risk of the volatility that comes with high-potential assets.
Not sure whether to use value vs. growth investing in your own portfolio? A financial advisor can help you decide.
Value investing is the practice of investing in “value stocks.”
A value stock is one that has a low price relative to the underlying company’s intrinsic value. With this strategy, you’re looking for stocks where the company is well-established and strong, but the share price doesn’t necessarily reflect the extent of the underlying company’s strength. This is otherwise expressed as a stock with a high book-to-market value.
In addition to strong book-to-market value (that is, a company with a high net asset value compared to its market capitalization), a few other features tend to characterize value stocks:
The overall profile of a value stock is that of a well-established, successful company that the market has overlooked. Value investing is the practice of buying these stocks for value and using them to build a portfolio.
Value investing is typically used for several investing strategies:
Growth investing is the practice of investing in “growth stocks.”
Where value stocks are assets that represent a strong underlying company, growth stocks tend to represent a business that has not yet been established. With a growth stock, the share price may be representative of the firm’s current value, or even comparatively high. Either way, it’s often based on the assumption that the company is poised for significant growth and a much higher share price to come. With growth investing, investors are often seeking out undiscovered companies, startups or emerging businesses, and are looking for big, short-term gains as the company explodes in value.
These are stocks that have a low book-to-market value. In other words, the company hasn’t taken full advantage of its capital yet, and is poised to turn that investment into growth and cash flow in the near future. Growth stocks are also known to be volatile, with relatively high share prices and price-to-earnings ratios. These are ideally undiscovered gems, trading at low price points, that are preparing to use their capital.
Growth investing is typically used for two portfolio profiles:
Value investing is often best used for a long-term portfolio, and for investing during a strong economy. Growth investing is often best used for a short-term, high-speculation portfolio, and for investing during a down economy. Knowing how to choose among value vs. growth stocks can help you make the right decision for your portfolio.
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