Of the many investment terms that are thrown around with little explanation for the typical investor, growth and value stocks tend to be the most misunderstood and confusing. Like many facets of investing, however, the terms growth and value aren’t necessarily as confounding as they might initially sound.
Growth and Value Basics
In a nutshell, both terms indicate where a particular stock might be trading relative to certain underlying fundamentals and perceptions. Although there can be some slight variance in definition between different investment firms, publications, or commentators, growth and value are two separate approaches to equity investing that focus on projected appreciation in the case of growth positions or purchasing undervalued stocks in a value-oriented approach.
When a stock displays strong earnings and investors project healthy future appreciation prospects, that stock is considered a growth equity. Growth investing relies on the traditional notion of purchasing a stock or group of stocks that are expected to grow well in the future by displaying consistent and solid fundamentals like earnings-per-share.
Alternatively, value investing looks for stocks that appear to be undervalued by the markets with respect to their fundamentals. Think of value stocks as being “on sale” for a certain amount of time and can be purchased at lower prices that can benefit your portfolio assuming prices start catching up with fundamentals.
While certain stocks can be defined as either growth or value for extended amounts of time, no single position will ever be permanently categorized as either. In other words, while a particular stock might be considered value today, it could very likely be a growth stock just a few years down the road.
Which Is Right For Me?
The differences between growth and value investing don’t necessarily make one right or wrong for you and your investing strategy. Instead, like any other form of investing or investments, both can play an important role to your portfolio. In fact, simply from a diversification perspective, holding both growth and value stocks in your asset allocation can help reduce the impact of volatility over the long run.
This content is designed to provide general information on the subjects covered. It is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney.
Gary Marriage Jr. is the founder and CEO of Nature Coast Financial Advisors, which educates retirees on how to protect their assets, increase their income and reduce their taxes. Marriage is a national speaker, delivering solutions for pre-retirees, business owners and seniors on the areas affecting their retirement and estates. He is an approved member of the National Ethics Bureau, and has been featured in “America’s Top Hometown Financial Advisors 2011” and was selected to contribute to a book with Steve Forbes titled “Successonomics”
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