GROWTH VS. VALUE
Growth vs. Value: What’s the Difference?
With the wide variety of stocks in the market, figuring out which ones you want to invest in can be a challenging task. Many investors feel it’s useful to have a system for finding stocks that might be worth buying, deciding what price to pay, and identifying when a stock should be sold. Bull markets – periods in which prices as a group tend to rise – and bear markets – periods of declining prices – can lead investors to make irrational choices. Having objective criteria for buying and selling can help you avoid emotional decision-making. Even if you don’t want to select stocks yourself – and many people would much prefer to have a professional do the work of researching specific investments – it can be helpful to understand the concepts that professionals use in evaluating and buying stocks. There are generally two schools of thought about how to choose stocks that may be worth investing in. Value investors generally buy stocks that appear to be bargains relative to the company’s intrinsic worth. Growth investors prefer companies that are growing quickly, and are less concerned with undervalued companies than with finding companies and industries that have the greatest potential for appreciation in share price. Either approach can help you better understand just what you’re buying – and why – when you choose a stock for your portfolio. VALUE INVESTING Value investors look for stocks with share prices that don’t fully reflect the value of the companies, and that are effectively trading at a discount to their true worth. A stock can have a low valuation for many reasons. The company may be struggling with business challenges such as legal problems, management difficulties, or tough competition. It may be in an industry that is currently out of favor with investors. It may be having difficulty expanding. It may have fallen on hard times. Or it may simply have been overlooked by other investors. A value investor believes that eventually the share price will rise to reflect what he or she perceives as the stock’s fair value. Value investing takes into account a company’s prospects, but is equally focused on whether it’s a good buy. A stock’s price- earnings (P/E) ratio – its share price divided by its earnings per share – is of particular interest to a value investor, as are the price-to-sales ratio, the dividend yield, the price-to-book ratio, and the rate of sales growth. VALUE-ORIENTED DATA Here are some of the questions a value investor might ask about a company: What would the company be worth if all its assets were sold? Does the company have hidden assets the market is ignoring? Is the company on the verge of a turnaround? What would the business be worth if another company acquired it? Does the company have intangible assets, such as a high level of brand-name recognition, strong new management, or dominance in its industry? CONTRARIANS: MARCHING TO A DIFFERENT DRUMMER A contrarian investor is one example of a value investor. Contrarians believe that the best way to invest is to buy when no one else wants to, or to focus on stocks or industries that are temporarily out of favor with the market.
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