You have two major approaches if you’re planning to grow your investment portfolio: value investing or growth investing. Growth stocks are shares in firms that have the ability to do better than the entire market over time because of their future potential. Value stocks are companies that are now trading for less than what they are really worth, thus they will provide you with a better return.
They differ in important ways, such as how risky they are, how volatile they are, and how much they pay in dividends. So, which group is better?
In this article, we’re going to dissect both types of stocks and get into it to settle the growth stocks vs value stocks debate once and for all.
Understanding Value Stocks
Value stocks are usually bigger, older corporations that sell for less than what analysts think they are worth, based on the financial ratio or benchmark used as a reference. For instance, if a firm has a capitalisation of $25 million and there are 1 million shares outstanding, the book value of its stock could be $25 a share. If it is currently trading for $20 a share, many analysts would say that this is a good value play.
There are various reasons why stocks can be worth less than they are. Sometimes, public opinion will lower the price, like when a high-ranking employee is involved in a personal controversy or the corporation does something wrong. But if the company’s finances are still pretty good, value-seekers may perceive this as a good time to buy because they think that people will soon forget about what happened, and the price will go back up to where it should be.
Value stocks frequently cost less than stocks with high P/E, book value, or cash flow ratios. Stocks can sometimes fall into both categories, blurring the line between growth stocks vs value stocks. People think these equities are worth less than they are, but they also think they could grow.
What is a Growth Stock?
Analysts think that growth stocks could do better than the general markets or a certain subsegment of them for a while. These stocks can be found in small-, mid-, and large-cap sectors, but they can only stay in these sectors until experts think they have reached their full potential.
Key Differences Between Growth and Value Stocks
So, what are the differences between growth and value stocks? Well, there is plenty to say the least.
| Factor | Growth Stocks | Value Stocks |
| Valuation Metrics | Trade at higher valuations with high P/E and price-to-book ratios. Investors pay a premium for growth potential. | Trade at lower valuations with low P/E and price-to-book ratios. Often seen as undervalued relative to their true worth. |
| Risk & Volatility | Tend to have higher risk and volatility. Prices fluctuate more due to market speculation and growth expectations. | Generally less volatile and lower risk. Offer greater stability but with slower growth potential. |
| Dividend Payments | Companies typically reinvest profits back into the business instead of paying dividends. Focus is on future expansion. | Often pay regular dividends, appealing to income-focused investors seeking steady cash flow. |
Performance of Growth Stocks vs Value Stocks
Now, let’s take a look at and understand how these stocks perform under different positions. Take a look at the table below for a fair comparison.
| Factor | Growth Stocks | Value Stocks |
| Performance in Bull Markets | Outperform during bull markets when the economy is strong and investor optimism is high. Prices rise sharply as investors pay more for future earnings potential. | Lag in bull markets as investors prefer high-growth opportunities over stable, slower-growing stocks. |
| Performance in Bear Markets | Underperform during bear markets due to higher volatility and sensitivity to economic slowdowns. | Perform better in bear markets because investors seek stability and steady dividends, making them safer investments in uncertain times. |
| Historical Performance Data | Excelled in the 2020 bull market, delivering significant returns. | Proved more resilient during the 2022 downturn, maintaining value and demonstrating stability under pressure. |
Conclusion
So there you have it, you now have an idea of the difference between growth stocks vs value stocks, how they perform in various markets, and how you can maximise your growth based on this data. Ideally, before you invest, you should research the stock in particular in which you’re planning to invest, and also about the company, as that research would go a long way before investment.
There is no one right answer for anyone when it comes to deciding between growth and value stocks. Your goals, how much risk you’re willing to take, and how long you want to invest will all affect your decision. Value stocks are more stable and pay dividends, which can be enticing in uncertain markets. Growth stocks, on the other hand, have more risk but also bigger potential profits.