Growth and value investing are two different approaches to investing in stocks.
Growth investors aim to invest in fast-growing companies, while value investors focus on finding undervalued stocks.
Growth investors buy stock in companies that are expanding rapidly and have (or will soon have) strong profits. These companies might have a new product or a unique business model that’s disrupting an existing industry, which is why investors expect big gains.
Value investors look for undervalued stocks or those trading for less than they’re actually worth. These companies are still fundamentally strong but have hit a temporary hiccup, such as a corporate scandal.
Investors who follow one approach or the other often have some specific characteristics in mind that they look for in a company before investing:
That said, every investor may have their own particular preferred approach and criteria.
“Whether we’re talking about socks or stocks, I like buying quality merchandise when it’s marked down.“
Growth investors and value investors may evaluate hundreds or thousands of stocks while they’re searching for a stock with the right characteristics. But the types of companies that meet each one’s criteria often end up fitting a certain profile.
Here’s what a typical growth stock or typical value stock might look like:
|Young and up-and-coming
|Older and more boring
In terms of returns, growth and value investing are pretty evenly matched.
Often, one approach will show better returns for a few years in a row. But inevitably, then the other approach will pull ahead and go through a period of stronger returns (investors may say that one approach is “in favor,” while the other is “out of favor” when this happens).
Instead of only investing according to one style, it usually makes sense to diversify by holding a bit of both. That can give you a mix of different types of companies in a variety of industries. And it means that you don’t have to worry about which approach is in or out of favor.
There are a few basic ways to invest with a growth and/or value approach:
Picking stocks yourself gives you more control over exactly what you own, but it also takes a lot more legwork. Investing with funds can give you instant diversification, but it also means you’re paying a management fee to the company that runs the fund.
Growth and value are two different styles investors can use to pick stocks. Growth investors look for companies with rapidly growing sales and profits. Value investors aim to find stocks that trade for less than what they’re really worth. Either approach can deliver solid returns over time, and it often makes sense to include some growth and some value investments in your portfolio.