You’ll likely encounter the terms “growth stock” and “value stock” in financial media or investing discussions. These terms describe a classification of stock investments that offer different methods for achieving returns.
Growth and value stocks are both popular choices for investment portfolios and some mix of them is likely right for your situation. However, before you purchase either type of stock, be sure to understand them.
What are growth stocks?
Growth stocks are companies that investors believe will grow more quickly than similar companies or a stock index. Investors are generally willing to pay a premium for these stocks because they expect the price to increase significantly at some point in the future. For this reason, growth stocks generally trade at a high price to earnings [P/E] ratio – also referred to as their multiple – compared to peers.
A company in any sector can be a growth stock, as long as investors forecast significant growth at some point in the future. The future expectations are often “priced in” well before the growth takes place, leading to the higher multiples that are generally expected for growth stocks.
What are value stocks?
Value stocks have a price that is thought to be lower than their intrinsic value – or the price calculated by evaluating their financial metrics. Value stocks are often seen as having “strong fundamentals” – meaning that the company performs well based on the principles of fundamental analysis – that the stock price has yet to reflect.
Like growth stocks, value stocks can be companies in any sector as long as the stock is trading below its intrinsic value. This calculation is somewhat subjective, with individual analysts often using different methods to calculate it. For this reason, the companies that are considered value stocks can differ depending on which analysts are evaluating them.
How do investors profit from growth and value stocks?
Investors profit from growth and value stocks in the same ways – price appreciation, dividends, or a combination of the two. While the classification of value or growth has no real impact on how you make your money, there are some general trends to notice.
The nature of a growth stock means you will usually see most of your gains through price appreciation. This is due to growth requiring capital, so a company in a growth cycle will generally reinvest profits rather than paying them out as dividends.
On the other hand, value stocks are usually companies that have already passed their major growth cycle, so multiples have stabilized, and their earnings are generally predictable. Companies of this nature often pay a significant portion of their profits to shareholders through dividends – since their growth prospects are limited or they’ve gotten so big that significant growth is difficult.
This means that a portfolio filled with growth stocks would expect the majority of its gains to come from price appreciation, while one heavy on value stocks could expect to provide income through dividends combined with more limited potential for price appreciation.
A Diversified Portfolio Typically Contains Both Growth and Value Stocks
A properly diversified portfolio will generally contain a mix of both growth and value stocks, and the mix will vary depending on the individual needs of the investor. As with all investing moves, the choice of which stocks you include in your portfolio should be made with your unique situation in mind. This is where a professional can help.
An experienced wealth manager can help you understand which investments are right for you by evaluating your personal situation and goals. Your advisor can then determine the right mix of stock types to help you reach those goals without accepting unnecessary risk.
Get A Custom Stock Portfolio from DreamWork Financial Group
At DreamWork Financial Group, we can help you determine the right mix of growth and value stocks for your situation and handle the investments on your behalf. We offer proprietary funds – like Dividend Collector and High Growth – that provide access to carefully cultivated groups of stocks designed to meet specific goals.
We believe that all investors should have access to this level of personalized advice – not just the ultra-wealthy. That’s why we created Investing Gameplan™ – a unique wealth management plan that is open to all investors, regardless of the amount they have to invest.
To learn more about Investing Gameplan™ and get started today, contact us.