Stocks can be best described as financial instruments that define a firm’s equity and ownership. People who invest in Stocks become owners of the concerned organization and share ownership with others.
Growth Stocks and Value Stocks are two of the fifteen types of Stocks that are often confused with one another. Growth Stocks refer to those Stocks that have the power to perform beyond expectations. Value Stocks refer to those Stocks whose value is underrated.
Comparison Between Growth Stocks And Value Stocks
|Parameter||Growth Stocks||Value Stocks|
|Meaning||It refers to stocks estimated to perform well or outperform other stocks in the market. These stocks are associated with generating higher profit and profitability in the short run.||It refers to stocks that can perform great and provide significant gains but is traded at a price that does not justify their worth. In short, these stocks are traded at a lower price than their worth.|
|Classification||There is a certain criterion for stocks to be labeled under the category of Growth stocks. For a stock to be referred to as a Growth stock, it must have a growth rate of at least 15% in the past five years.||Just like Growth stocks, there is a specific criterion for a Value stock. A stock is labeled under the Value stock category when it has a price-to-sale ratio below one, meaning it is underpriced.|
|Data used for classification||The past data of the concerned stock is used to classify various stocks under the category of Growth stocks.||The present data of the concerned stock is used to classify various stocks under the category of Value stocks.|
|Working||These stocks work using Growth Investing. Under this method, investors look for those stocks that happen to promise immediate growth and profitability.||These stocks work using Value Investing. Under this method, investors look for stocks that happen to be underpriced but promise steady growth and profitability in the future.|
|Growth in performance||Higher growth is the trademark feature of these stocks. These stocks promise to generate high growth in the short run.||These stocks do promise growth, or else no one would buy them. But, these stocks can commonly pace up with the growth for a long time as the market realizes their true worth or value.|
|Price||In many cases, these stocks are priced at a price that does justice to their worth, meaning they are accurately priced as per their actual worth. But in many cases, it is also extremely possible for these stocks to be overpriced or overvalued. This is because these stocks promise higher growth and perform really well.||Lower price is the trademark feature of these stocks. These stocks are traded at a price that does not justify their actual price. However, as the market continues to realize their actual worth, their prices increase and give profit to the currency stockholders.|
|Profitability||Since these stocks can achieve higher growth immediately, they also provide great profitability in the short run. Apart from higher growth, these stocks are only known for their higher returns.||These stocks might take a while to pace up with the growth rate, but eventually, they do so. However, it might take some time. But despite that, these stocks always provide considerable profitability in the long run, as and when the market realizes their true worth.|
|Investment metric ratios||Various investment metric ratios such as the Price/Earnings ratio, Earnings per Share Ratio, and Price/Book ratios are high in the case of these stocks.||Various investment metric ratios such as the Price/Earnings ratio, Earnings per Share Ratio, and Price/Book ratios are low in the case of these stocks.|
|Issued by||These stocks are largely issued by newer or younger, or smaller companies that are yet to make their name in the market and are promising higher growth and profitability.||These stocks are largely issued by older or bigger companies that have established their name in the market.|
|Risk||These stocks carry a higher degree of risk in comparison with Value stocks. This is because these stocks are largely issued by newer companies, who are yet to establish themselves in the market, and no one can predict the future performance of their stocks. Thus, investing in such stocks might be a little riskier.||These stocks carry a lower degree of risk in comparison with Growth stocks. This is largely because these stocks are issued by older companies that are well-established in the market. Investors can easily predict the performance of their stocks.|
Differences Between Growth Stocks And Value Stocks
Before understanding the differences between Growth and Value stocks, it is crucial to understand what exactly stocks are.
What Exactly Are Stocks?
When a company is in need of some funds, it can generate funds in two ways, i.e., through Bonds and Stocks. Stocks can be best described as financial instruments that are concerned with representing an organization’s equity or ownership.
When people buy these instruments, they gain a percentage share of ownership in the concerned organization. And in return, it becomes the concerned organization’s duty to pay the stockholders some dividends regularly.
These financial instruments can be broadly categorized into Common and Preferred. Other categories include Class A Stock, Class B Stock, Growth Stock, Value Stock, International Stock, IPO Stock, Large Cap Stock, Middle Cap Stock, Small Cap Stock, Blue Chip Stock, Penny Stock, ESG Stock, Cyclical Stocks, and Defensive Stocks.
What Exactly Are Growth Stocks?
Growth stocks can be best described as a type of stock that has a very good performance. These stocks have the power to grow more rapidly than any other stocks. Since these stocks grow very fast, they also provide higher profitability.
Typically, new companies issue these stocks to people; since they are new, no one can predict their future performance.
Hence, investing in these stocks can be considered pretty risky. Speaking of their pricing, these stocks are valued at a price they are worthy of, but sometimes can be overvalued or overpriced too.
Key Takeaways: Growth Stocks
- These are a type of stocks that are associated with performing well. These stocks tend to grow at a rate that is faster than the growth rate of any other stock.
- Since these stocks perform well, these stocks also provide great profitability to the concerned stockholders.
- Mostly these stocks are issued by new companies, and thus, it can be considered riskier to invest in such stocks. This is because the performance of such companies can not be predicted as they are new.
- These stocks are priced at a value that they are worthy of. However, in some cases, they happen to be overpriced or overvalued too.
- Several ratios, such as the Price/Earnings ratio, Earnings per Share Ratio, and Price/Book ratio, happen to be high in the case of such stocks.
- These stocks work through Growth Investing.
What Exactly Are Value Stocks?
Value stocks are a type of stock that happens to be valued or priced at a rate that is less than its actual worth. As a result, these stocks do not immediately grow or excel in performance but in the long run.
Due to this reason, they also provide profitability in the long run, as the market understands their true value.
Older companies largely issue these stocks; hence, they are considered less risky to invest in, as it is easier to predict the performance of the old companies.
Key Takeaways: Value Stocks
- The trademark feature of these stocks is that they are traded at a value or price lower than their actual worth or value. These stocks are believed to grow in the long run, but not immediately.
- These stocks also provide profitability to stockholders, but since these stocks grow in the long run, these stocks also provide profitability in the long run.
- Old companies largely issue these stocks; thus, these investments are considered less risky. This is because the performance of old companies can easily be predicted since they have been in the market for a long time.
- These stocks are associated with low Price/Earnings ratios, Earnings per Share Ratios, and Price/Book ratios.
- These stocks work using Value Investing.
The Contrast Between Growth And Value stocks
- Growth stocks – These stocks can best be described as financial instruments estimated to perform beyond expectations. These stocks are believed to grow at a rate that is faster than any other stock. In simple terms, the growth rate of such stocks is very high compared to other stocks. People who own these stocks are referred to as Growth stockholders.
- Value stocks – These stocks can be best described as financial instruments that are priced or valued at a lower price than their actual worth. It takes some time for the market to realize the actual value of these stocks, and when that happens, their prices rise. Until then, people profit more as they buy them at a discounted rate.
- Growth stocks – In case you are wondering, how do we know if a stock is a Growth or Value? No problem. We got you. For a stock to fall under the Growth stock category, its company’s past data is considered. As per the criteria, the concerned Growth stocks must have at least a 15 percent growth rate in the past five years’ average sales.
- Value stocks – For a stock to be classified under the category of Value stocks, its present date is considered. As per the criteria, the concerned Value stock must have a price-to-sale ratio under the value of one. This means that the ratio must state that the concerned stock is undervalued or underpriced.
- Growth stocks – These stocks work using Growth Investing. As per this method of investing, various investors aim to invest in companies that offer stocks expected to generate growth rates more than the average growth rates in the concerned market. Such investors most commonly target younger or newer and small companies estimated to expand their operations in the future.
- Value stocks – These stocks work using Value Investing. As per this method of investing, investors aim to target companies or stocks priced at a rate lower than their actual worth but offer considerable gains or returns. Generally, investors target older and bigger companies for such purposes.
Growth In Performance
- Growth Stocks – The trademark feature of these types of stocks is their very high growth. And thus, they are named so. These stocks gain high growth in the short run. However, not much can be said about their growth in the long run.
- Value Stocks – The hallmark feature of these types of stocks is that these stocks are associated with growth in the long run. These stocks are not expected to provide high growth in the short run. But over time, they provide higher growth and profitability. as the market realizes their market.
- Growth Stocks – These stocks are traded for a price that denotes their actual worth. However, in many cases, these stocks also happen to be overpriced or overvalued too. This is largely because these stocks aim to provide a very high growth or performance along with high profitability, and that too, in the short run.
- Value Stocks – The unique feature of these stocks is that they are traded for a price that does not do justice to their actual worth, meaning these stocks are typically underpriced. However, their value considerably increases as the market realizes their actual worth.
- Growth Stocks – These stocks provide bigger gains, and that too in the short run. This is because these stocks continue to grow faster, even in the short run. If these stocks continue to perform better, they will provide considerable gains.
- Value stocks – These stocks provide higher dividend yields, but it should be noted that higher dividend yields may happen once these stocks start to grow better.
Investment metric ratios
- Growth stocks – These stocks are concerned with a high Price/Earnings ratio (or price to earnings ratio), Earnings per Share Ratio, and Price/Book ratios (or price to book ratio).
- Value stocks – These stocks are concerned with a low Price/Earnings ratio, Earnings per Share Ratio, and Price/Book ratio.
Types Of Ratios
- Price/Earning ratio: This ratio depicts the present price of a stock or shares against the company’s per-share earnings. A high ratio represents that the prices of stocks are higher than their earnings or return. At the same time, a low ratio represents that the prices of stocks are low compared to their return or earnings.
- Earnings Per Share Ratio: This is one of the most widely used investment metric ratios concerned with representing how much money a company makes by its single share. A high ratio depicts the higher profitability of a company, while a low ratio indicates the lower profitability of a company.
- Price/Book Ratios: As the name suggests, this ratio represents the company’s book value to its market value. A high ratio depicts that the stocks or shares of a company have been selling at a profit, whereas a low ratio represents that the shares of a company have been selling at a loss.
- Growth stocks – New companies mainly issue these stocks. Due to this reason, these stocks happen to achieve higher growth rates in the short run. It should be noted that the issuing companies being new is the main reason these stocks grow faster than any other stocks, as it is tough to predict the performance of a new company.
- Value stocks – Old companies typically issue these stocks. These companies are well-established in the market, so their performance can be easily predicted and considered reliable. People like investing in these stocks as there is reliability and these stocks are offered at a discounted rate.
- Growth Stocks – Since these stocks are largely issued by new companies whose performance is considered difficult to predict, these stocks are generally considered riskier than Value stocks.
- Value Stocks – Since these stocks are largely issued by old companies whose performance is easy to predict, as these companies have been in the market for a long time and are considered pretty reliable. Thus, the degree of risk involved with these stocks is considerably lower than the risk involved in the Growth stocks.
- Growth stocks – Higher growth and higher profitability are the major advantages of these stocks. In many cases, these stocks do not require huge minimal investments, which is another benefit of investing in them.
- Value stocks – The major advantage of these stocks is that they are very affordable and perform well, meaning they are profitable.
- Growth stocks – Despite their higher growth and profitability rates, they remain one of the riskiest investments, making up for their biggest drawback. Also, these stocks might not be able to generate enough returns in the short run.
- Value stocks: These stocks might not be able to generate growth and profitability in the short run and sometimes even in the long run. When that happens, stockholders have nothing but losses.
The words Growth stocks and Value stocks confuse people, especially those who do not have a financial background.
The major difference between Growth stocks and Value stocks is that the former achieves a higher growth rate in the short run while the latter is usually traded at a lower price than their actual worth.
FREQUENTLY ASKED QUESTIONS (FAQs)
Q1. How are stocks classified under the category of Growth and Value?
For a stock to be classified as Growth, it must have a growth rate of at least 15% in the past five years. On the other hand, a stock must have a price-to-sale ratio below one to be classified as a Value stock.
Q2. Which stocks are associated with more risk: Growth or Value?
The former is associated with more risk because newer companies largely issue these stocks, and their future performance is considered harder to predict.
Q3. How do Growth stocks and Value stocks affect metric investment ratios?
The former type of stock is associated with high investment metric ratios, while the latter type is associated with low investment metric ratios.
Q4. What is meant by Value Investing?
Value Investing is a way of finding stocks that happen to be undervalued or underpriced but offer great returns and then investing in such stocks. These stocks are referred to as Value stocks.
Q5. What are the significant differences between Growth stocks and Value stocks?
The major difference between Growth and Value stock is that the former generates high performance or growth even in the short run. Still, the latter might take time to generate good performance, but it definitely does and is always underpriced or undervalued.
Q6. Are Growth stocks always overpriced?
In many cases, these stocks are usually overpriced or overvalued, but in many cases, they are also priced per their actual worth.
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