Value investing vs growth investing–how do these strategies differ and which one is right for you? Largely, this decision will depend on your personal financial goals and your investment preferences, though many portfolios utilize both strategies for better diversification.
With all the volatility in the markets these days, you may see these terms thrown around a lot and wonder which route would be best for you. Continue reading to learn more about each investment strategy and how value vs growth investing compare. By the end of this article, you’ll be well equipped with the necessary information to start investing with one of these strategies. Let’s not waste any more time!
Value Investing vs Growth Investing: What Are The Differences?
When comparing growth investing vs value investing and deciding which strategy investors should utilize, they need to be aware of the key differences between the two, and when each strategy is better suited to their needs and preferences. This isn’t to say that you need to use just one or the other–but understanding the differences in these two investing styles can help you better optimize your portfolios and recognize profitable investment opportunities.
While value investing is typically seen as buying stocks below their appraised value and getting a good deal on quality shares, growth investing is utilized on stocks that show above-average growth potential. It isn’t uncommon for shares to be placed into one of these two buckets, value or growth, though oftentimes there are many shares that fall in-between and aren’t clearly one or the other.
Even still, thinking about value investing vs growth investing can help to see how each style can be beneficial, and which one is right for you at any given time, or even which one you have a preference for. Similar to the decision to choose between swing trading and long-term trading, investors need to decide the time horizon that they are looking to invest over, and what their personal financial goals are. Let’s start by breaking down each investment style before we compare and contrast them more in-depth.
What Is Value Investing?
First things first – what is value investing?
Value investing is a type of strategy where you are able to buy assets, in this instance, stocks, at or below their actual value. This type of investing is seen as getting a good deal on stocks when the price is right, and the reason the shares are undervalued could be due to a variety of factors such as disappointing quarterly earnings or a short-term setback across the industry.
Value stocks tend to be in traditional industries with predictable business models and sources of revenue rather than providing something flashy and new. They also tend to have a higher dividend yield. When comparing value vs growth investing, value investors look for companies that are undervalued compared to their perceived earnings and revenue growth potential. Value stocks don’t grow quickly; rather, they provide steady and reliable growth over time.
What Is Growth Investing?
Growth investing is often done with shares of small, quickly-growing companies that are becoming industry leaders in a short period of time. In regards to financials and what to look out for when doing growth investing vs value investing, these types of companies typically prioritize growing revenues quickly, with less of an emphasis on profitability at the onset.
Investors recognize the quick growth, which increases the perceived value of these companies, and thus, the value of their stock. Because of this, key indicators like price-to-earnings are generally higher for these companies. The idea is that with increased investor buy-in, the price of the stock rises, which makes the investors happy, and then the cycle continues, bringing them returns on their initial investment and making the company look good to new investors.
Value Investing vs Growth Investing: Which Is Right For You?
Now that you have a better understanding of the two strategies and how value and growth investing differ, we can discuss when each method is better for investors and which one is right for you to get started with. When thinking about value investing vs growth investing, both strategies can be extremely beneficial for investors, which is why your portfolio may incorporate bits and pieces of each investing style for better diversification and maximum gains.
In simple terms, the major difference between value vs growth investing is that with value stocks, investors think the companies are undervalued by the market at large. Meanwhile, growth stocks often show outsized growth potential. Just like when you’re considering swing trading vs position trading, there is no clear answer for which method is better, or which one you’ll be more successful with.
But, answering questions like how soon you want to see growth, your personal financial goals, and considering your preferences can help you make the decision to use value investing vs growth investing. So, let’s break down the differences a little more.
Value stocks are more income-producing than growth stocks
Investing in value stocks often provides investors with regular income through frequent cash dividends, which value companies offer to attract investors rather than promise quick growth. On the contrary, growth investing is probably better suited for investors who aren’t looking to get regular income via dividends from their portfolios. Growth companies typically don’t prioritize paying out cash dividends to shareholders, preferring instead to retain these earnings and plow them back into investments to boost further growth.
Price graphs are more stable for value stocks
The share price of growth stocks tends to be more volatile, so investors looking to utilize a growth strategy shouldn’t be concerned by regular price swings. When it comes to value investing, this strategy is better suited for investors who are looking for shares with more stable and steady price trajectories, without frequent fluctuations. You may follow a specific screening and investing technique known as “ruler stocks”. As the name suggests, the consistency and predictability of these stocks is so solid that you can draw a straight line through their quarter to quarter 12-months earning performance. The best part? Finding them with the VectorVest software is so simple – just screen for stocks with Safety>=1.40 and Growth Rating>=14%.
Value stocks realize their potential quicker than growth stocks
Patience is a big part of growth investing, because growth stocks often take a while to realize their full potential so you need to make sure you have the time horizon to let these companies grow. On the other hand, value investing is a good idea for those who are looking for a quicker payout. This doesn’t typically happen within a matter of days or hours, but it can be a relatively quick turnaround period for the price to rise substantially if the company is on a solid path forward.
Both have different strategies for identifying opportunities
Part of implementing growth investing vs value investing is also being able to choose the winners in growing industries, so if this isn’t in your skillset, maybe growth investing isn’t the right style for you. At the same time, value investors need to avoid value traps, and not assume that just because a company’s shares are cheap, it is a good deal. So, when you identify a company with an attractive valuation and a nice entry point, make sure to look long-term to see if their growth prospects have diminished and are no longer competitive in their market.
Value vs growth investing: the verdict
Considering the above-mentioned factors and which style you identify more with, you can realize which method is right for you and decide between value vs growth investing.
- Are you more flexible with your investment timeline, and can handle the price swings? Growth investing is better for you.
- Are you looking for income-producing stocks with stable and reliable growth? Value investing is better for you.
Again, it’s common for portfolios to have a good blend of each style, like finding the balance between trend trading and swing trading, though some investors show a distinct preference for one or the other.
Tips For Success Whether You Try Value or Growth Investing
Regardless of which investment style you choose to implement, there are some universal rules of thumb that all investors can benefit from. Continue reading to learn about some of the top tips for success when investing.
Diversify your portfolio
When investing using any strategy, diversifying your portfolio is highly recommended to mitigate risks. So, when it comes to value investing vs growth investing, there is no right answer, and utilizing a blend of each style can actually improve your diversification.
Ride out the highs and lows
Investors need to be aware that market fluctuations and downturns are par for the course. Making emotional decisions when seeing your portfolio is suffering or feeling invincible when you’re all in the green doesn’t help anyone over the long term, so be prepared to ride the wave and endure the market corrections.
Remember you’re buying into a company’s future
Another important aspect to keep in mind no matter your choice of value vs growth investing is to remember what buying shares actually means. When you purchase stock, you are buying into a specific company, so you need to consider their future prospects and growth potential and whether you can expect some level of growth in their stock price. As mentioned above, don’t fall into the trap of buying cheap stocks just because you can–put some time into your research to make sure you are making informed investment decisions.
Utilize the right tools
Above all, each type of investing hinges on having the right information to make profitable and informed investment decisions. You must be able to time your entries and exits with precision for maximum profits, like when utilizing swing or scalp trading. Even if you’re debating whether to implement growth investing vs value investing, having the right tool at your fingertips can take care of both of these aspects and can help you see more green in your portfolio no matter which style you choose. In a sense, you can use tools that help you identify when a market has bottomed out and get in on value stocks at the best time. There are screeners that return the best investment opportunities at any given time. Why do all the research and hard work yourself when formulas are in place to do it for you? That’s where VectorVest comes in.
VectorVest offers stock forecasting tools that can help investors better predict future price movements, and time their trades accordingly. The benefits of using a tool like VectorVest cannot be understated and can provide traders with an upper hand in the markets. To see how VectorVest works for yourself, try out their free stock analysis to get started.
Final Thoughts On Value vs Growth Investing
It’s one thing to read about the various investing styles and choose the right strategy for you, but it’s another thing completely to try it out for yourself. Many portfolios have elements of both growth and value investing in them, and over the long-term, neither strategy has outperformed the other. Choosing between value investing vs growth investing largely comes down to personal preference and where your financial goals and skills lie, though there is no wrong answer.
Regardless of the path you choose to take–growth investing vs value investing–utilizing the right tools can be the difference between a shrinking portfolio or soaring gains. Give yourself the best chance at success in the stock market by trying VectorVest today.
Not only can it provide you with real-time insights into the markets, but it gives you concrete advice about whether you should buy, hold, or sell certain shares–without having to play the guessing game. There’s no other tool that can give you the piece of mind when making trades like VectorVest. To see the difference firsthand, try VectorVest for yourself and start making better investment decisions today.