A savvy investor will tell you that there is more than one way of investing. A smart investor will make sure they mix their investment approach when it comes to investing in different stocks, etc.
Growth and value investing are two different styles of investing that have their own merits, and both seek to fulfil the common goal of maximizing the value of investment for the investors.
These are stocks of those companies that have registered better than the average gains in the market and are projected to continue with the high growth rates. Of course, these are only projections based on empirical evidence and the results are impacted by the market conditions.
These emerging growth companies do not have a long history of big earnings but have shown potential for high earnings. These stocks tend to be more volatile than their peers and are accompanied by the possibilities of sharp price drops premised on negative news and market sentiments.
This means that these companies continue their high earning performance even in the face of adverse economic conditions. This happens while other companies tend to slow down owing to disappointing market conditions.
Growth stocks are also much higher priced comparatively as investors are ready to pay a higher price to acquire them with the prospect of selling them at a much higher price as the company grows.
These are companies whose stock prices are not the real determinants of their worth. Investors with a keen eye for profits seek out these companies that seem to be undervalued in the market, but are backed by strong potential.
Such companies can be analysed by a comparative study of their current market value and their intrinsic value. The intrinsic value of these firms can be calculated by taking into consideration a lot of factors.
These are financial statements of the company, its business model, management and its position amongst its competitors in the market. If a company’s current market value is lower than its intrinsic value, it is said to be of value.
Value Investing stocks are accompanied with lesser levels of risk as compared to the rest of the market. These are better suited for long-term investment horizons.
Prices of value stocks are quoted at rates below similar other companies in their industry. They are no doubt priced lower and cheaper than growth stocks.
It is assumed that the stocks of companies with good intrinsic value are capable of surviving unfavourable economic scenarios in the long run and the investor faith will help the company bounce back.
Value stocks, as seen from past performances, tend to do well during the period of early economic recovery but post that begins to slacken a bit when the bull market is sustained.
Suitability of Growth Investing vs Value Investing
Both these approaches have their benefits. A combination of growth and value investing in the longer-term period is not an uncommon sight as it has the potential of high returns with less risk involved.
Technically speaking, this approach enables investors to benefit through the economic cycles where the scenario may either favour value or growth stocks. This ensures a smooth return on investment over a course of time.
Summing it up
Questions about which is a better option of investment have been answered by some studies that indicate that value investing has a better performance record in the long run on a value adjusted condition, but growth investment is known to give very high returns.