Stock trading or investment is one of the most sought investment options for many investors. It does require some evaluation and lots of patience. Stock trading is not just about buying and selling stocks of different companies. However, it’s more about reading those companies, and there are two standard approaches – Value Investing and Growth Investing. There’s no need to panic if you have heard about them for the first time because our expert is here to help you out.
Our expert is none other than Malik Mullino, CEO of Jadeite Assets LLC and a retired-marine who’s been helping people for a long time.
According to Malik Mullino, ” value and growth investments are two fundamental approaches to stock investments “. Both have their perks and downs, but both seek to maximize the investment value to investors.”
To explain in it simple words, in value investing, investors go with undervalued stocks. In contrast, in growth investing, investors buy stocks of companies with the potential to outperform the market at the time.
Here’s a better breakdown of Value and Growth Investment to help you understand them in a better way.
In the value investment approach, investors lookout for the companies which have fallen but still have strong fundamentals. These are the well established and big corporations, which have been trading below their worth.
There could be several reasons for a stock being undervalued. Public perceptions of these corporations matter a lot, which hinders the prices; chances could be that company or its central personnel could be caught in some scandal or some unethical practice. But at the same time, the company’s financials are still as strong it was, and that is why value investors opt for such stocks because the company’s finances will hold up, and after a while, the public will forget about these scandals, and the price will rise to where it should have been.
Consider a company X with a stock price of $20 a share, based on the number of shares outstanding divided by its capitalization. But, right now, it’s trading for $10 a share, which is quite a good deal considering that stocks’ price will be up after a while.
Here are some of the critical characteristics of the growth funds
- Priced lower than the overall market: The idea behind value investing is that good companies’ stocks will bounce back in time if other investors recognize the actual value.
- Priced below similar companies in the industry: Many value investors believe that most stocks are undervalued due to investors’ overreaction to recent company problems, such as low earnings, negative publicity, or it could be some legal issues, which might not matter in the long run.
- Carry somewhat less risk than the market: There’s one good thing that these stocks take time to turn around so that value stocks may be more suited to longer-term investors.
In the growth investment approach, the companies have registered more gains which have caught investors’ eyes since it is expected to continue with such a trend.
But what’s the reason behind such a good performance. Well, the gains might be unexpectedly high due to the company’s recent performance, or some of its product performing well enough in the market with a promise of ’emergence’ over the years.
Consider a company that’s been trading for $30 a share while its competitors are still at $18 a share and the price of stocks of the first company is rising steadily, then it will be considered as a growth stock or company.
Growth stocks can be found in small, mid or large-cap sectors as long as analysts conclude that they have achieved their potential.
Now, what’s the reason behind investors feeling confident about growth stock’s future. The main reason could be a company working on a product expected to excel in the coming years or minting more money than its competitors.
- Higher priced than the market. Investors are willing to pay a high price with the expectation of selling them at even higher prices as the companies continue to grow over the years.
- High earnings growth records: Growth companies potentially continue to achieve high earning regardless of economic conditions even if its not suitable for the market.
- More volatile than the market. There’s a risk in buying a growth stock as its price could fall sharply any day, mainly if earnings don’t go well with big traders.
Well, there’s one more category, a blend of both; a stock can also be undervalued while performing better than the market standards at the same time.
Value Investing and Growth Investing – Which Is Better?
On comparing the historical trends, value stocks are considered to have a lower level of risk, atleast theoretically, since they are well established, and big-time corporations whose fate will turn around sometime in future, and investing in value stocks might not result in a capital loss since these stocks also pay dividends.
Meanwhile, growth stocks don’t offer dividends and reinvest the earnings back into the company. The probability of growth stocks going down is more than the value stocks if the company is unable to keep up with the market’s growth expectations. So overall, growth stocks come with the biggest reward and risk at the same time.
Some people opt for both value and growth stocks when investing for the long term since the risk will be reduced, and gains could be multiplied depending on how the market fares out in future. This approach enables investors to profit from the economic cycles, whether it’s beneficial for the value or growth stock.
As Malik Mullino says, the decision to invest is a personal choice. The same person can only decide whether to invest in growth or value stocks. It depends on their risk tolerance and investment goals. But it is essential to study the market and to evaluate the company before proceeding with the investment.
At last, it’s all about you. It’s only you who can decide where to put your money, but if you need help, you can reach out to our CEO Malik Mullino for any suggestions.